Equity Linked Savings Schemes (ELSS) are diversified equity funds that offer tax benefits to investors under section 80 C of the Income Tax. Investment made in ELSS is subject to lock-in for a period of 3 years. In this period, ELSS cannot be redeemed, transferred or pledged.
Equity Linked Savings Schemes (ELSS) are mostly used by Individuals and HUFs(Hindu Undivided Family) to save tax under section 80 C, which stand at a maximum of Rs. 1.5 Lacs. In this sense, they compete against other tax Saving products like PPF, NSC and Five year bank Fixed deposit. While historical returns from ELSS are in general much better than other tax saving instruments, it should be fully understood by the investors that ELSS does not not provide guaranteed returns and even negative returns are quite possible. ELSS provides returns which are linked to performance of underlying equity investments as ELSS Mutual Fund schemes are mandated to hold at least 80% of their portfolio in equity instruments.
Despite the risk associated with them, many investors prefer to invest in ELSS, as along with tax savings, they offer a possibility to provide capital appreciation which may effectively be able to beat inflation. Also the lock in period is lower than that of other tax saving instruments. The returns on maturity of ELSS which used to be tax free till this financial year now stand changed to 10% flat tax on the capital gains at the time of maturity.
Top ELSS Mutual Funds by AUM
There are 12 ELSS Mutual Funds with AUM > 1000 crore as on end Dec 2018 based on the information gathered by us . The annualized Return over last 3 years and expense ratio have been depicted. All Data pertains to Direct Growth Option of these funds which is considered to be a good choice for investors.
| Fund | AUM (cr) | Ret 3y | Exp % |
| Axis LT equity | 17,626 | 13.30% | 0.91% |
| Reliance tax saver | 9847 | 7.59% | 1.31% |
| ABSL Tax Relief 96 | 6984 | 13.64% | 1.17% |
| HDFC Tax Saver | 6734 | 10.56% | 1.46% |
| SBI Magnum Taxgain | 6377 | 8.31% | 1.55% |
| ICICI LT Eq Tax | 5486 | 10.99% | 1.34% |
| DSP taxsaver | 4567 | 12.94% | 1.07% |
| Franklin Ind Tax shield | 3686 | 10.41% | 1.15% |
| L&T Tax Advantage | 3220 | 12.94% | 1.55% |
| Mirae Asset Tax Saver | 1209 | 20.12%* | 0.35% |
| MOSL LT Equity | 1128 | 15.60% | 0.90% |
| UTI LT Equity | 1054 | 9.78% | 1.59% |
Axis Long term Equity Fund has the largest AUM with reasonable expenses at 0.91% and a reasonable 3 year annualized return. Mirae Asset Tax saver launched only three years back and MOSL Long Term equity fund appear good on basis of 3 year annualized return which matches with the time period of investments by most investors in these Funds. Both these funds have a low expense ratio with Mirae Asset Tax saver clocking the lowest expense ratio of all ELSS funds.
ELSS Performance vs Benchmarks
The annualized returns from these ELSS Funds for four time periods i.e. 6 months, one year, 3 year and 5 Year has been depicted below. The returns can be compared to BSE 200 TRI benchmark for sake of convenience . While these ELSS schemes have their own benchmark, BSE 200 TRI can be considerable to be appropriate for this purpose.
| As on 21-12-18 | ||||
| Particulars | Ret 6m | Ret 1yr | Ret 3yr | Ret 5yr |
| Benchmark | ||||
| BSE 200 TRI | 2.85% | 1.29% | 12.88% | 14.46% |
| Mutual Funds | ||||
| Axis LT equity | 0.83% | 4.49% | 13.30% | 21.34% |
| Reliance tax saver | 2.26% | -19.75% | 7.59% | 17.63% |
| ABSL Tax Relief 96 | 6.00% | -3.39 | 13.64% | 20.05% |
| HDFC Tax Saver | 2.48% | -10.20% | 10.56% | 14.84% |
| SBI Magnum Taxgain | 3.90% | -7.36% | 8.31% | 14.58% |
| ICICI LT Eq Tax | 3.17% | 1.39% | 10.99% | 16.87% |
| DSP taxsaver | 3.33% | -6.84% | 12.94% | 18.31% |
| Franklin Ind Tax shield | 1.10% | -1.75% | 10.41% | 17.40% |
| L&T Tax Advantage | -1.59% | -7.25% | 12.94% | 16.79% |
| Mirae Asset Tax Saver | 5.71% | -0.80% | 20.12%* | NA |
| MOSL LT Equity | -4.07% | -7.37% | 15.60% | NA |
| UTI LT Equity | 2.09% | -5.57% | 9.78% | 14.14% |
Axis LT equity and ABSL Tax Relief 96 have performed well. Mirae asset has a history of 3 years only and has done well. Motilal Oswal Long term equity seems to under pressure in last one year period compared to its earlier performance which was good.
ELSS Funds: Statistical Measures
Out of many parameters that can be used to measure the volatility in performance and risk adjusted performance of a mutual fund, we limit ourselves to two statistical indicators Alpha and Beta.
In simple terms , Alpha represent the value that a fund manager adds or subtracts from a fund portfolio’s return. An alpha of 1.0 means the fund has outperformed its benchmark by 1%. Similarly , an alpha of -1.0 would indicate an under performance by the fund by 1%.
Beta is a measure of the volatility, or the systematic risk of the fund portfolio with respect to the market in totality. A beta near to 1.0 indicates that the funds investment’s value will move in tandem with the market. A beta of less than 1.0 indicates that the funds NAV is less volatile than the market or benchmark. Correspondingly, a beta of more than 1.0 indicates that the funds NAV is more volatile than the market. A fund with beta of 1.3 is theoretically 30% more volatile than the market. Thus mutual fund schemes with a a higher alpha and lower beta are considered as better performers under this framework.
| Fund | Ret 3y | Alpha | Beta |
| Axis LT equity | 13.30% | 1.36 | 0.93 |
| Reliance tax saver | 7.59% | -6.4 | 1.17 |
| ABSL Tax Relief 96 | 13.64% | 1.38 | 0.94 |
| HDFC Tax Saver | 10.56% | -3.41 | 1.06 |
| SBI Magnum Taxgain | 8.31% | -4.35 | 1 |
| ICICI LT Eq Tax | 10.99% | -1.97 | 0.86 |
| DSP taxsaver | 12.94% | -0.63 | 1.07 |
| Franklin Ind Tax shield | 10.41% | 1.02% | -1.37 |
| L&T Tax Advantage | 12.94% | -1.56 | 0.86 |
| Mirae Asset Tax Saver | 20.12%* | NA | NA |
| MOSL LT Equity | 15.60% | 4.07 | 0.86 |
| UTI LT Equity | 9.78% | -2.65 | 0.99 |
Axis LT equity fund, ABSL Tax Relief 96 fund, Motilal Oswal Long term equity fund fit in this criteria of a higher alpha and a lower Beta. Since Mirae asset has a history of little less than 3 years these statistics are not available for the fund.
Assessment
- Introduction of 10% tax on Long term gains has reduced the return from ELSS schemes.
- There can be no single choice for the best ELSS fund to invest in. However some Funds based on historical performace appear better.
- Mirae asset Tax saver which is the youngest of above funds, has performed well in the ELSS category and has the lowest expense ratio too.
- Axis Long Term Equity Fund, the largest ELSS Fund is ranked 2nd in ELSS category by Crisil for quarter ended Sep 2018 . It is the largest Fund by AUM and the scheme has been a good performer in many years in the past.
- Aditya Birla Sunlife Taxsaver 96 is one of the oldest in the industry with overall good long term performance and is ranked at No. 1 by CRISIL. It is managed by same Fund manager for over a decade now.
- Most investors consider their tax planning exercise only toward the end of the year. A better approach is to invest in ELSS in tranches when markets are down.
- Investors especially with a younger age profile and long-term investment horizon would be better off investing in tax-saving options linked to equity such as equity linked savings scheme (ELSS) to also generate wealth over a longer investment horizon.
- Return on ELSS investments is linked to the market and hence these schemes unlike fixed income products do not offer guaranteed returns . Investors need to be well aware of this risk element and should not give undue weight age to historical returns and thus keep in mind their risk appetite before investing in ELSS.
- ELSS funds have given annualized returns of about 18% in the past 15 years compared with 7-9%% provided by traditional fixed income products like NSC, PPF, Bank FDs. One should not expect ELSS Funds to repeat the same performance year after year and return expectations should be mellowed down to 10-12 per cent tax-free (11-11-13% absolute returns based on 10% tax) from ELSS funds over a larger time frame.