Best tax saving mutual funds or ELSS to invest in 2018

Looking to save taxes under Section 80C of the Income Tax Act this tax-saving season? Well, here are the best tax-saving plans for you.

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Here is an update on our recommended Equity Linked Saving Schemes or tax-saving mutual fund schemes in November. The good news is that there is no change in our list of recommended schemes this month. We had added two more ELSSs to our recommended list last month.

For the new comers, investments in ELSS or tax saving/planning mutual fund schemes qualify for tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. These schemes with a mandatory lock-in period of three years, possibly the shortest lock-in period among tax-saving investments permitted under Section 80C. However, you should invest in them with an investment horizon of at least seven years.

These schemes invest mostly in equity. That makes them a risky investment proposition. However, they can also reward you with extra returns for the extra risk. Investors with a high risk appetite and an investment horizon of five to seven years can consider investing in these schemes to save taxes and earn extra returns. Other investment options under Section 80C are meant for conservative investors, and they offer modest returns.

Mutual fund experts suggest that it is always better to start your tax-planning exercise in the beginning of the new financial year. It makes even more sense if you are planning to invest in Equity Linked Saving Schemes or ELSSs (they are also known as tax-saving mutual fund schemes) to save taxes under Section 80C in this financial year.

So, if you are planning to invest in ELSS, start investing right away. Here is why it is the best strategy for you. One, it is always better to stagger your investments in equity schemes. Two, investing regularly would impart discipline to your financial life. Lastly, it would also save you from the last-minute running around to save taxes before the end of the financial year.

Why is an ELSS the best tax-saving option for many investors? Well, to begin with, ELSSs come with a shortest mandatory lock-in period of three years. Other investment options like National Savings Certificate and Public Provident Fund permitted under Section 80C have a longer lock-in period. Two, tax-saving mutual funds invest mostly in stocks. This makes them an ideal investment option to create wealth over a long period. The mandatory lock-in period is a blessing in disguise as it helps many investors, especially the new ones, to weather the volatility in the stock market.

Investment experts ask taxpayers to link a long-term financial goal to the ELSS investments. They believe that such a strategy would help investors stay focused on their investment objective. You don’t have to sell your ELSS investments after the mandatory lock-in period. If it is performing well, you can hold to it to achieve your financial goal.

Also Read: Best Midcap Mutual Funds to invest in 2018 and Best smallcap mutual funds to invest in 2018

Here are our recommended ELSS fund you can invest in 2018. As said before, invest with a long horizon to achieve a long-term financial goal.

Best ELSS Mutual Funds
Scheme Name 1-yr return (%) 3-yr return (%) 5-yr return (%)
Aditya Birla Sun Life Tax Relief 96 -2.84 12.26
Axis Long Term Equity Fund 3.18
L&T Tax Advantage Fund -3.45 12.68 17.45
Motilal Oswal Long Term Equity Fund -6.21 12.89 NA
HDFC Long Term Advantage Fund -2.77 13.16 16.87
Invesco India Tax Plan -0.17 11.22 19.05

Methodology: Mutual Funds has employed the following parameters for shortlisting the Equity mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii) When H is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: It is measured by Jensen's Alpha for the last three years. Jensen's Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index - Risk Free Rate}
5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)
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