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Best tax saving mutual funds or ELSS to invest in 2018

Here is an update on our recommended Equity Linked Saving Schemes or tax-saving mutual fund schemes in October. We have added two more ELSSs to our recommended list. You can see the name of schemes in the table below.

For the new comers, investments in ELSS or tax saving/planning mutual fund schemes qualify for tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. These schemes with a mandatory lock-in period of three years, possibly the shortest lock-in period among tax-saving investments permitted under Section 80C. However, you should invest in them with an investment horizon of at least seven years.
These schemes invest mostly in equity. That makes them a risky investment proposition. However, they can also reward you with extra returns for the extra risk. Investors with a high risk appetite and an investment horizon of five to seven years can consider investing in these schemes to save taxes and earn extra returns. Other investment options under Section 80C are meant for conservative investors, and they offer modest returns.

Mutual fund experts suggest that it is always better to start your tax-planning exercise in the beginning of the new financial year. It makes even more sense if you are planning to invest in Equity Linked Saving Schemes or ELSSs (they are also known as tax-saving mutual fund schemes) to save taxes under Section 80C in this financial year.

So, if you are planning to invest in ELSS, start investing right away. Here is why it is the best strategy for you. One, it is always better to stagger your investments in equity schemes. Two, investing regularly would impart discipline to your financial life. Lastly, it would also save you from the last-minute running around to save taxes before the end of the financial year.

Earlier, Aditya Birla Sun Life Mutual Fund has decided to merge their two tax-saving schemes to comply with Sebi’s new norms of mutual fund categorisation. The fund house announced the merger of Aditya Birla Sun Life Tax Savings Fund into Aditya Birla Sun Life Tax Relief ’96. Both the schemes were tax-saving or ELSS schemes with a three-year lock-in period.

Why is an ELSS the best tax-saving option for many investors? Well, to begin with, ELSSs come with a shortest mandatory lock-in period of three years. Other investment options like National Savings Certificate and Public Provident Fund permitted under Section 80C have a longer lock-in period. Two, tax-saving mutual funds invest mostly in stocks. This makes them an ideal investment option to create wealth over a long period. The mandatory lock-in period is a blessing in disguise as it helps many investors, especially the new ones, to weather the volatility in the stock market.

Investment experts ask taxpayers to link a long-term financial goal to the ELSS investments. They believe that such a strategy would help investors stay focused on their investment objective. You don’t have to sell your ELSS investments after the mandatory lock-in period. If it is performing well, you can hold to it to achieve your financial goal.

Also Read: Best Midcap Mutual Funds to invest in 2018 and Best smallcap mutual funds to invest in 2018

Here are our recommended ELSS fund you can invest in 2018. As said before, invest with a long horizon to achieve a long-term financial goal.

Best ELSS Mutual Funds
Scheme Name 1-yr return (%) 3-yr return (%) 5-yr return (%)
Aditya Birla Sun Life Tax Relief 96 -0.88 10.77 20.15
Axis Long Term Equity Fund 2.06 9.04 20.95
L&T Tax Advantage Fund -3.72 10.46 16.95
Motilal Oswal Long Term Equity Fund -7.91 11.90 NA
HDFC Long Term Advantage Fund 0.39 11.30 16.71
Invesco India Tax Plan 3.47 9.92 19.24

Methodology: Mutual Funds has employed the following parameters for shortlisting the mutual fund schemes.
1. Mean rolling returns: rolled daily for the last three years.
2. Consistency in the last three years: The three-year period is divided into smaller time periods each with a progressing weighting.
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this. X =Returns below zero Y = Sum of all squares of X Z = Y/number of days taken for computing the ratio Downside risk = Square root of Z
4. Outperformance: It is measured by Jensen's Alpha for the last three years. Jensen's Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme - [Risk Free Rate + Beta of the MF Scheme * {(Average return of the index - Risk Free Rate}
5. Asset size: For equity diversified funds, the threshold asset size is Rs 100 crore, and Rs 50 crore for balanced funds.
We have also conducted a back testing of our model portfolios. These returns are forward returns from the base date.

(Disclaimer: past performance is no guarantee for future performance.)




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