Best Tax Saving Mutual Fund For 2018-19: Are ELSSs The Best Option?


Tax saving mutual funds are often touted as the best option for tax saving. However, with the market correcting from its all-time highs in January 2018, are investors beginning to reconsider their investment options? They better not.

Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs 1.50 lakh. There is a wide range of investments that qualify for a deduction, such as, Public Provident Fund (PPF), 5-year Tax-saving Bank Fixed Deposit, Equity Linked Saving Schemes (ELSS) of mutual funds, National Savings Certificate (NSC), etc.  You can claim an additional deduction of up to Rs 50,000, if you have invested in the National Pension Scheme (NPS).

Those who do not mind the high risk of equity investments prefer to invest in ELSSs among all the other tax-saving products. Due to the massive gains over the past few years, the attractiveness of equity mutual funds has increased. 

Among the tax-saving products, ELSSs are the most liquid with the shortest lock-in period of three years. They are also among the riskiest. When investing in ELSSs, you should keep a long-term investment horizon of five years or more. By keeping a long-term investment horizon, you can benefit from compounding and multiply your wealth at the same time.

Here's 5 reasons why ELSS is a preferred tax-saving option -

  1. Short Lock-in Period

    While your tax saving investments in PPF is locked in for 15 years, NSC for 6 years and tax saving bank fixed deposits for 5 years, your investments in ELSS is locked in for just 3 years. So, if you are looking for tax benefits along with higher return potential, but liquidity of the investment is a high priority as well, then ELSS is something you should look for.

  2. Tax Advantage Over Bank FDs, NSCs

    While the interest income from investments in the provident fund is exempt from tax, you need to pay tax on interest income from Bank Deposits , NSCs and most other tax saving options. For ELSSs too, the long-term capital gain are taxable under the current tax laws. You need to pay tax @10% on gains over Rs 1 lakh.  This is still lower than the tax rate on other products, where the income is taxed as per your tax bracket.

  3. Long Term Wealth Creation

    Like all equity-linked investments, ELSSs too are positioned for the highest returns possible. You can depend on the best ELSS to potentially grow your money in a matter of 5-7 years (considering the market is favourable, of course). While other tax-saving options like ULIPs and NPS too give exposure to equity, the cost structure and the investment mandate under mutual funds is more transparent and better regulated.t.

  4. Option to invest regularly

    PPF and NPS are among the tax saving products that offer you a facility for auto debit. Your bank account is automatically debited for investment on the date chosen. Systematic Investment Plans (SIPs) of mutual funds operate in a similar way. You can begin with a minimum investment of Rs 500 via SIP. Investing in ELSS through SIP is the best approach to sail the tides of market volatility. Hence, avoid waiting till the last quarter of the year to make a lump-sum investment in ELSS, you can start a SIP an invest regularly.

  5. Convenience

    Mutual funds are by far the most convenient investment avenue. Even if you are new to the world of mutual funds, a mutual fund account can be set up from the comfort of your home. Everything from eKYC to redemptions can be initiated with a few clicks. Many fund houses, distributors, and even robo-advisers offer mobile apps through which you can transact and track your investments. Such facilities are not freely available for other tax saving avenues.

Picking the right ELSS fund


There is no dearth of choices in the ELSS mutual fund category. Hence, you need to analyse the fund performance minutely before investing. Remember, that under ELSS, the lock-in is three years. Thus, if you pick the wrong fund, you will have to bear the cost of underperformance for the entire period.

The performance of ELSS funds can vary wildly over the years. A top ELSS fund in one period may not necessarily be the best ELSS fund for the next period. Thus, you need to pick the right ELSS fund, one that has performed consistently and one that has generated a superior risk-adjusted performance.

Let us have a look at the three-year return of the top ELSS funds from three years ago (as on June 20, 2015). We will then compare these funds to the top performing ELSSs over three years, as on June 20, 2018.

Top Performing ELSS Funds as on June 20, 2015

Scheme Name 20-Jun-2012 To 
20-Jun-2015 (%)
2012 -2015
2015 - 2018
Axis Long Term Equity Fund 34.82 1 12
IDFC Tax Advantage (ELSS) Fund 30.69 2 13
Reliance Tax Saver (ELSS) Fund 30.32 3 30
Aditya Birla SL Tax Relief '96 29.38 4 2
Invesco India Tax Plan 28.41 5 8
Aditya Birla SL Tax Plan 28.41 6 5
BNP Paribas Long Term Equity Fund 27.87 7 31
JM Tax Gain Fund 27.65 8 18
Franklin India Taxshield 27.01 9 20
Principal Tax Savings Fund 26.85 10 3
Data as on June 20, 2015 Returns are compounded
(Source ACE MF, PersonalFN Research)

Axis Long Term Equity Fund, IDFC Tax Advantage (ELSS) Fund, Reliance Tax Saver (ELSS) Fund, Aditya Birla Sun Life Tax Relief '96, and Invesco India Tax Plan were the top ELSS funds with the highest returns over June 20, 2012 to June 20, 2015.

But among these top 5 ELSS funds, just two—Aditya Birla Sun Life Tax Relief'96 and Invesco India Tax Plan continued their top ranking performance. The others featured lower down the order when ranked as per their performance in the following three-year period (2015-18).

Which were the top ranking ELSS funds in the past three years? Have a look below:

Top Performing ELSS Funds as on June 20, 2018

Scheme Name 20-Jun-2015 To 
20-Jun-2018 (%)
2012 -2015
2015 - 2018
Escorts Tax 15.46 34 1
Aditya Birla SL Tax Relief '96 14.03 4 2
Principal Tax Savings Fund 14.02 10 3
Tata India Tax Savings Fund 13.85 15 4
Aditya Birla SL Tax Plan 13.62 6 5
L&T Tax Advantage Fund 13.27 21 6
BOI AXA Tax Advantage Fund 13.14 20 7
Invesco India Tax Plan 12.56 5 8
DSPBR Tax Saver Fund 12.38 11 9
HDFC Long Term Advantage Fund 12.32 24 10
Data as on June 20, 2018 Returns are compounded
(Source ACE MF, PersonalFN Research)

There were some unexpected performers over the past three years. Among the top five performing ELSSs were Escorts Tax, Aditya Birla SL Tax Relief '96, Principal Tax Savings Fund, Tata India Tax Savings Fund, and Aditya Birla SL Tax Plan.

Three of these names, were present among the top 10 ELSS fund of 2012-15. As many as four ELSS funds, which ranked 20 or lower, made it to the list of top ELSS funds in 2015-18. This clearly shows that schemes that did well over one period, may not necessarily do well over the next.

Just four funds were present among the top 10 funds in both the periods. This is concerning because there were just 34 ELSS funds on the list.

Thus, if you select ELSS funds solely by the basis of past performance, you may end up disappointed. So, before locking-in your investment for three years, think again.

When selecting ELSSs or any mutual fund for that matter, you need to choose wisely and look for consistency in performance. Escorts Tax, for example, ranked at the bottom of the list in the 2012-15 period, but shot up to the top of the list in 2015-18. And, a scheme like Reliance Tax Saver (ELSS) Fund, which as among the top 3 in 2012-15, featured among the bottom 5 in 2015-18.

You also need to pay heed to tax planning. While there are a host of provisions under the Income Tax Act and numerous investment avenues; in this video tutorial, we will take you through how to use mutual funds in your tax planning exercise. Also, the aspects you must consider while investing in them, so as to save tax through this investment instrument the prudent way.

If you are not sure about how to align these schemes with your tax planning or financial goals, do consult your investment consultant/advisor.

As an investor, you need to pick the right and suitable ELSS funds to meet your financial goals.

Hence, a process that combines both quantitative and qualitative factors has a good chance of picking funds that can deliver decent market-beating returns. The quantitative factors will cover the fund's performance across multiple periods and market cycles, as well as the fund's ability to manage risk among other factors.

If you are looking for the top ELSS funds to invest in 2018, subscribe to PersonalFN's Exclusive Report - 3 Tax-Saving Mutual Funds For 2018.

In this report, you will find the Top 3 ELSS Funds that are geared to grow your investment multi-fold over the long-term, while saving your taxes. These Top 3 ELSS are handpicked through our special 7-point Selection Matrix methodology and are considered to be potentially the best tax-saving mutual funds in the Indian market.

Click here to know more about Top 3 ELSS report.

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Author: Jason Monteiro


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