Tax Planning: Review of top 6 Equity Linked Mutual Fund Saving Schemes

Tax planning is an important concern for a lot of people looking to save taxes under Section 80C. Section 80C of Income Tax Act allows tax payers to claim deductions from their taxable income by investing in certain instruments. Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C, since the investors can avail double benefits of capital appreciation and tax savings. An ELSS is a diversified equity scheme with a lock in period of three years from the date of the investment. If you investment in an ELSS through a systematic investment plan (SIP), each investment will be locked in for 3 years from their respective investment dates. There are both growth and dividend options for ELSS. For tax purposes, returns from ELSS are tax free. Compared to other tax saving instruments under Section 80C like PPF and NSC, ELSS has a much lower lock-in period and has the potential of offering superior returns over the long term. However ELSS is subject to market risks, like other mutual funds.

In this article, we will review the top performing ELSS. As with all mutual fund investments, recent performance may not always be sustained in the future. One needs to look at a number of parameters to compare and rank schemes, relative to their peer group. CRISIL¹ ranks ELSS based on several parameters like average 3 year annualized returns, volatility, portfolio concentration risk (both industry and company) and portfolio liquidity risk. On each of these parameters, each scheme is accorded a cluster rank² (from 1 to 5) relative to its peer group. To derive a composite cluster rank, CRISL has assigned different weightages to each parameter, with average 3 year annualized return given the highest weightage at 50%, volatility 30%, industry concentration risk 10%, company concentration risk 5% and liquidity risk 5%. Here is the list of top 6 ELSS on the basis of annualized 3 year returns:-

1. Axis Long Term Equity Fund (CRISIL Rank 1):

   Axis Long Term Equity Fund has provided the highest 3 year annualized return at nearly 30%². It has consistently outperformed all its peers in terms of annual returns over the 3 years period. Volatility of returns is low relative to its peers, as per CRISIL ranking. Its portfolio is sufficiently diversified, with a large cap bias, with HDFC bank, Kotak Mahindra Bank, TCS, HDFC and Sun Pharma accounting for nearly 32% of its portfolio. However, the overall portfolio is sufficiently diversified with the top 10 stocks accounting to just over 51% of the portfolio. The fund is well diversified across sectors with the top 3, Banking / Finance, Auto and Pharma accounting to just over 53% of the portfolio.



2. Birla Sun Life Tax Relief 96 (CRISIL Rank 2):

   The 3 year annualized return of Birla Sun Life Tax Relief 96 fund is nearly 25%². While the volatility of returns is in line with its peer set as per CRISIL ranking, it has provided high annualized returns relative most peers, over the last 1 year. In terms of portfolio composition, the fund has a large cap bias with Honeywell Automation, Sundaram Clayton, Bayer Cropscience, ICRA and Kotak Mahindra Bank accounting for nearly 26%, the fund is well diversified with top 10 stock accounting for only 43% of its overall portfolio. In terms of sectoral allocation Banking / Finance, Automobiles and Services account for about 52% of portfolio.



3. Birla Sun Life Tax Plan (CRISIL Rank 2):

   Birla Sun Life Tax Plan’s 3 year and 1 year annualized returns stand at nearly 24 and 15%² respectively, outperforming ELSS as a category over each of these periods. Volatility of returns is in line with its peers, as per CRISIL ranking. In terms of portfolio composition, the fund has a large cap bias with Honeywell Automation, Sundaram Clayton, Bayer Cropscience, ICRA and Kotak Mahindra Bank accounting for nearly 26%, the fund is well diversified with top 10 stock accounting
   
   1_{CRISIL Rank: 1 – Very Good; 2 – Good; 3 – Average; 4 – Below Average; 5 – Relatively Weak}
   2_{Based on NAV as on 30/10/2015}
   
   for only 42% of its overall portfolio. In terms of industry concentration, Banking / Finance, Automobiles and Services account for 50% of portfolio.



4. Religare Invesco Tax Plan (CRISIL Rank 1):

   The annualized 3 year and 1 year returns of Religare Invesco Tax Plan are nearly 24% and 11%² respectively. The volatility of the fund is in line with its peers. The fund manager has balanced mix of large cap and mid cap scrips in the portfolio. Top 5 companies HDFC Bank, TCS, Maruti Suzuki, Infosys and HDFC account for 31% of the portfolio. However, the portfolio is diversified with the top 10 holding accounting for about 49%. In terms of industry concentration Banking / Finance, IT, Automobiles and Pharma account for 65% of the portfolio.



5. BNP Paribas Long Term Equity Fund (CRISIL Rank 2):

   The annualized 3 year and 1 year returns of BNP Paribas Long Term Equity Fund are nearly 24% and 11%² respectively. The volatility of returns is average relative to its peer group. The portfolio is fairly well diversified across large cap companies, with the top 5 holdings HDFC Bank, Idea Cellular, Bharti Airtel, Indusind Bank and Kotak Mahindra Bank accounting for nearly 32% of the portfolio value, while top 10 holdings account for about 49% of the portfolio. In terms of industry exposure the fund is well diversified with Banking / Finance, Telecom and IT accounting for nearly 53% of the portfolio.



6. Franklin India Taxshield (CRISIL Rank 2):

   The annualized 3 year and 1 year returns of Franklin India Taxshield are nearly 23% and 11%² respectively. Volatility of returns is low relative to its peers, as per CRISIL ranking. The portfolio has a large cap bias, with the top 5 holdings, HDFC Bank, Infosys, Indusind Bank, ICICI Bank and Bharti Airtel, accounting for 24% of the portfolio. The top 10 holdings account for about 37%. In terms of industry exposure, Banking / Finance, IT and Pharma account for 49% of the portfolio.
   
   

   Source: Advisorkhoj Research

   3_{With respect to Benchmark Indices}

Benefits of ELSS

1. Equity Linked Savings Schemes are eligible for deduction from taxable income under Section 80C of the Income Tax Act. The investment limit eligible for tax deduction in Section 80C has been increased to र 150,000 from FY 2014 – 2015 onwards, allowing tax payers to save up to र 46,350 in taxes.


2. ELSS offers more liquidity than most investment options under Section 80C.


3. ELSS is also one of the most tax efficient investments. Capital gains and dividends in ELSS tax free.


4. ELSS is one of the best investment options for young investors from a wealth creation perspective. Please see our article, ELSS is one of the best retirement planning investments for young investors

Conclusion

ELSS or tax saver funds should form an essential part of investor's mutual fund portfolios. Over a long investment horizon, investors can not only save substantial amount in income taxes, but also create wealth to meet their long term financial goals.