Tax saving mutual funds or ELSS (Equity Linked Savings Scheme) are your best bet when it comes to choose an investment instrument with tax saving benefits. The ELSS fund is an equity mutual fund with a definite tax advantage.
As per Section 80C of the Income Tax Act, you can claim tax deduction up to Rs. 1.5 lakh if you invest in an ELSS fund. Apart from tax benefit, the investor can consider an ELSS as a wealth generation asset, considering the tremendous returns the fund is capable of giving, on a long-term basis.
The other benefits of ELSS funds are transparency and low charges. These funds have a lock-in period of 3 years, which means you have to remain invested in a chosen fund of 3 years, after which you can redeem it. Compared to open-ended diversified funds, ELSS have given better returns; because with investments still pooled in the system for at least 3 years, the fund managers can take judicious picks.
Here are the top 5 tax saving mutual funds for the year 2016. Please note that that data is based on findings as per August 2016.
1. Axis Long Term Equity Fund – The fund has delivered 21.71 percent and 31.55 percent returns on a 5 year and 3-year basis. The Axis Long Term Equity Fund was launched in 2009, and since inception, it has delivered 19.59 percent. It is a multi-cap fund with 70 percent of its corpus parked in large caps, while the rest is in mid cap and small caps, on an average. The top 5 sectors invested in by Axis Long Term Equity Fund are financials, automobile, healthcare, chemicals and technology. The expense ratio is 1.98 percent. The fund focuses on scalable business models, solid growth and high return on investment.
2. Reliance Tax Saver Fund – The fund boasts of a proven track record across the years. It has been around since September 21, 2005. The returns since inception has been 15.65 percent. Over a 10, 5 and 3-year period, the fund has returned 15.34 percent, 19.16 percent and 34.04 percent respectively. The expense ratio is 2.01 percent. The top 5 sectors in which the fund invests are financial, engineering, automobile, services and diversified. The fund can have termed ‘high risk’ because unlike most ELSS funds that follow a multi-cap approach with a relatively safe large-cap bias, the large cap exposure in Reliance Tax Saver for the past two years has been 30 to 40 percent with a much higher concentration in small and mid-caps.
3. DSP BlackRock Tax Saver Fund – The fund has returned 29.02 percent in a 3-year period and 18.97 percent in a 5-year period. The top five sectors the fund concentrates on are financial, energy, healthcare, construction and automobile. The expense ratio is 2.53 percent. The fund was launched in the year 2007, and since its launch, it has delivered 14.63 percent.
4. Birla Sun Life Tax Relief 96 – This is one of the oldest tax saving mutual funds launched on March 29, 1996. Since its launch, it has given 26.03 percent returns. The returns as per 10, 5 and 3 years have been 13.91 percent, 18.14 percent and 29.79 percent respectively. The top 5 holdings have been in financial, automobile, services, healthcare and FMCG. The expense ratio of this fund is 2.42 percent. The fund attributes 55 to 60 percent in large caps and the rest in small and mid-caps. The fund has a penchant for doing exceptionally well in bull markets.
5. Franklin India Taxshield Fund – Like Birla Sun Life Tax Relief 96, the Franklin India Taxshield Fund is also an old horse, having launched on April 10, 1999. The return since launch has been 24.64 percent. It delivered 15.72 percent in the past ten years, 18.09 in five and 27.28 percent in the past three years. The expense ratio is 2. 41 percent. The top five sectors that the fund invests in are financial, automobile, technology, healthcare and engineering. The fund is a favorite of investors who want a risk-averse approach in an ELSS fund. With an average of 75 percent in large caps, the fund is especially formidable in reducing losses in bear markets, rather than outpacing its peers in bull phases.