How To Select Worthy ELSS For Tax Saving This Year
Sep 10, 2019

Author: Divya Grover

(Image source: Image by Steve Buissinne from Pixabay)

We are almost half-way through the financial year 2019-20 and the stock market continues to take investors on a roller coaster ride.

While there are many factors causing market turbulence, the most prominent ones are economic slowdown, FPI outflows, liquidity crisis in NBFCs, as well as some international factors such as US-China trade war and other geopolitical tensions.

The losses are unlikely to reverse soon as the factors impacting market conditions are not expected to be resolved in the foreseeable future.

In such an environment, it is easy for investors to fall prey to the negative sentiments and ignore the bigger (long term) picture. However, challenges in the economy do not mean that everything is gloom and doom - there is light at the end of the tunnel.

[Read: Why You Should Not Avoid Investing in Equity Mutual Funds Now...]

The correction in the market offers investors a good opportunity to invest with a decent margin of safety. In other words, now is a good time to invest in stocks trading below their intrinsic value, but have the potential to grow in the future.

Chart: Valuations of Nifty 50 and Nifty MidCap 100 in the last one year

Valuations of Nifty 50 and Nifty MidCap 100 in the last one year

As can be seen in the table above, the P/E of Nifty MidCap 100 has declined sharply in the last one year. During the same time frame, the P/E of Nifty 50 has retained its level within a similar range.

[Read: Why You Should Not Ignore Worthy 'Value Funds' Now]

Large caps have the potential to grow despite the challenges and provide stability to your portfolio at the same time. Whereas, mid and small caps have the potential to generate high returns, though the risk involved is higher too. To get the benefit of stability and higher returns, investors can look to invest in funds following a multi-cap approach.

Furthermore, with around 6-months remaining before the end of the financial year, smart investors would know that it would be imprudent to wait till the end moment to start tax-planning.

[Read: Should You Be Investing in ELSS At The Beginning Of The Financial Year?]

If you are a moderately-high risk taker with an investment horizon of more than three years, you can consider Equity-linked Saving Schemes (ELSS) as a tax saving avenue. ELSS provide the dual benefit of tax-saving along with the potential to generate higher returns with investments in a diversified portfolio of equities.

Investments in ELSS qualify for tax exemption up to Rs 1.5 lakh for the financial year under Section 80C of the Income Tax Act. However, one should not invest in ELSS just for the tax benefit. Before investing, you must assess how this investment would fit in your overall asset allocation.

Every ELSS follows a different approach. Some schemes are large-cap biased, while others focus on mid and small-caps. Similarly, some schemes prefer to have a compact portfolio, while some have a large portfolio size.

Regardless of the nature of the portfolio, you should invest in ELSS with a long-term view. Many investors tend to sell their investment in ELSS after the 3-year lock-in period.

Ideally, you should continue with your investment even after the lock-in period if you have invested in a  worthwhile scheme. This is especially true if your fund has mid-cap and small-cap bias, as these stocks require a longer time horizon to show their true potential.

You can opt for the SIP route to mitigate the volatility and to get the benefit of rupee-cost averaging and compounding of wealth.

Table: Top performing ELSS on a 3-year return basis

Data as on September 10, 2019
(Source: ACE MF)

​*Please note, this table only represents the best performing Equity Linked Saving Schemes based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.

Despite volatile markets in the past one and a half year, some ELSS schemes managed to perform well and rewarded investors with reasonable gains. Mirae Asset Tax Saver Fund, Axis Long Term Equity Fund, and Motilal Oswal Long Term Equity Fund were the top performers on a 3-year return basis. On a 5-year return basis, some schemes managed to deliver satisfactory returns, though the returns were not impressive enough.

On the other hand, some schemes delivered below-par performance and could not reward the investors even during the longer 5-year time horizon.

Since, ELSS come with a lock-in period, you will not be able to exit or switch to other schemes if your fund underperforms during this period. Remember that every SIP instalment is subject to a lock-in period of three years. This emphasises the importance of prudently selecting the right ELSS.

[Read: How SIP-ping Into Unworthy Mutual Fund Scheme May Cost Your Financial Wellbeing]

To select the right ELSS for your portfolio, you need to evaluate the performance of the schemes based on various quantitative and qualitative parameters. Then shortlist the one that has performed consistently better than the benchmark and category peers across market phases and has delivered superior risk-adjusted returns.

If you are holding other equity schemes in your portfolio, it would be beneficial if the investment style and strategy of the ELSS you wish to invest in differs from your existing schemes.

However, ELSS should not be part of your Core portfolio. Your core portfolio should consist of large-cap fund, multi-cap fund, and value style fund.

Editors' note: Do you want to know the best mutual fund schemes to SIP into, ELSS for tax saving this year, and schemes that have the potential to provide BIG gains?

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