ELSS Tax Saving Mutual Funds: Broad Comparison

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elss 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.
Standard disclaimer:  I am not a SEBI registered analyst and above analysis is for educational purpose only. Iam Certified in NISM-Series-V-A: Mutual Fund Distributors Certification Examination  but not involved in selling of any mutual fund products. I may have bias/vested interest in covered Stock/Funds/NCD etc. due to my own investment or  leaning. Further my understanding of the areas on which I write may be imperfect or incomplete. Please do your own due diligence as stock market investments have high degree of inherent risk.
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