Tax saving is an important part of financial planning. A proper tax saving plan not only save your taxes but also gives you the higher return. One of those options of getting the higher return is with tax saving is ELSS (Equity Linked Savings Scheme) or tax saving mutual fund. Now, I have shortlisted the five best tax saving mutual fund by which you will get a high return. You can also find top 10 best SIPs to invest.
What is ELSS?
ELSS or Tax savings mutual funds are the types of a mutual fund by which you can save income tax under section 80C of income tax act. If you invest Rs 1.5 lakh in ELSS funds you can save up to Rs 45000 as income tax.
The lock-in period for tax saving mutual funds is 3 years. You cannot withdraw money within 3 years of investing in the ELSS funds. Remember, the same is applicable for each time you purchase SIP. Every SIP is a fresh investment to the fund. That’s why you have to wait for 3 years from the date of investment to redeem the units of the fund. Suppose, you have a SIP of Rs 1000 to an ELSS fund on 5th of every month. You have invested Rs 1000 (20 Units) on 5th September 2017 and Rs 1000 (19 units) on 5th October 2017 and so on. You will be able to withdraw or redeem 20 units only after 5th September 2020 and another 19 units only after 5th October 2020.
Also Read: ELSS vs PPF – Where to Invest for Tax Saving
Taxation of ELSS or Tax Saving Mutual Funds:
You can save Up to Rs 45000 depending on your tax slab by investing in ELSS funds. The investment in ELSS falls under the Exempt-Exempt-Exempt category of income tax. You get the tax benefit for the investment, the interest earned (in this case – value appreciation) is tax-free and the maturity amount is also tax-free.
As you are locked in with the investment for three years and able to sell the fund after three years only there is no capital gain tax applicable. If you want to know more about the taxation of all types of mutual funds read my other article – capital gain tax on mutual fund.
I have used following guidelines to screen the 5 best tax saving mutual funds.
- Asset under Management (AUM) size is to be greater than 500 cr as higher the AUM means it has gained the investors’ confidence to put the money in those funds. I am a bit biased on this parameter. Somebody may hold a different view also.
- Presence of at least 5 years in the market. We can assume that the fund has been time-tested across various market situations in these 5 years.
- Past annual return of more than 15% for 5 years. It means the fund is present in the market with excellent performance.
- At least 4-star rating from Valueresearch and Morningstar India. A higher rating indicates that the funds can perform well with respect to the others.
- I have considered only the growth option of the fund in the regular category for comparison.
- There are various ratios which show the risk-return analysis. I have not got into the details of ratios over here. As you are investing in ELSS scheme which has a lock-in period of three years the fund managers are not in a hurry and they can manage the funds well. You can read How to judge mutual fund performance and understand the risk-return analysis.
5 Best Tax Saving Mutual Fund:
On the basis of above criteria, the following funds are shortlisted.
1. Axis Long Term Equity:
Axis Long-term equity fund has been started to generate long-term capital growth from a diversified portfolio of equity.
The fund has a very minimum expense ratio of 1.97% and it has generated a 5-year return of 22.98%.
The fund has consistently beaten the benchmark S&P BSE 200. This fund has invested in the stocks from different sectors such as financial, automobile, Chemicals, construction service industry etc.
You can start a SIP on Axis Long Term Equity Fund with as minimum as Rs 500.
2. Aditya Birla Sun Life Tax Relief 96
The scheme seeks long-term capital growth and will invest approximately 80 percent of its assets in equity, while the balance would be invested in debt and money market instrument.
It is one of the oldest funds launched in March 1996. The expense ratio of the fund is 2.32%.
The fund has generated a return of 22.37% over the last 5 years and consistently beat the benchmark Nifty 500.
The fund has a very good portfolio of stocks from all sectors. Some of the key holdings are Sundaram Clayton, Gillette, Johnson Controls, Bayer Crop Science etc.
3. DSP Blackrock Tax Saver
This fund seeks to generate medium to long-term capital appreciation from a diversified portfolio that is substantially constituted of equity and equity related securities of corporates and to enable investors avail of deduction from total income, as permitted under the income tax act.
The expense ratio of the fund is 2.51%. The fund has generated a 5-year return of 21.04%.
It has consistently beaten the benchmark Nifty 500. The fund has a very good portfolio of equity holdings from different sectors such as financial, Metal, Energy, Construction, FMCG etc.
4. Aditya Birla Sun Life Tax Plan:
Aditya Birla Sun life tax plan is an open-ended ELSS with the objective to achieve long-term growth of capital along with income tax relief for investment.
The performance of this fund is consistently good and it has beaten the benchmark Nifty 500 index.
The expense ratio of the fund is 2.55% and it has generated a return of 21.56% over 5 years. The fund has invested in Automobile, Healthcare, FMCG, Consumer durables sector.
5. Tata India Tax Savings:
Tata India Tax savings Fund has the investment objective of long-term capital growth. The investment in equity is at least 80% and the rest 20% is invested in debt and money market instruments.
The 5-year return is at more than 20% which is 21.82%. The expense ratio for this fund is 2.44%. You can start SIP in this fund with as minimum as Rs 500.
The fund has the investment in sectors such as financial, manufacturing, energy, Pharma, Automobile, Construction etc.
How to invest in ELSS?
You have chosen the right ELSS fund and now want to invest. You can take different options to invest in ELSS funds. It can be done via offline mode as well as online mode. You can invest through mutual fund broker, you fill up the form, give the cheque or bank mandate. The agent will submit the form to fund house on behalf of you and you are invested in the fund. The agent does not take commission from you rather they got it from fund houses.
The online mode is more comfortable to new age investors like you and also to me :). There are various websites by which you can invest in a mutual fund one time or SIP way. You need to have internet banking facility to be able to transact with a fund house. You don’t need to do paperwork and it is easily trackable in one place. Some websites like Groww.in also gives you the opportunity to clear your doubts related to ELSS funds through the expert community.
From the above article, you get the best ELSS funds to invest in 2018. Investing in ELSS funds is the best option to save tax and grow your wealth. It has the lowest lock-in period among all the tax savings options. The high return along with the shortest lock-in period made ELSS funds as the best tax saving plan. So invest in ELSS funds if you have not yet exhausted your 80C limit of income tax.
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