Best ELSS or tax saving mutual funds to invest in 2019

Many mutual fund investors are hunting for the best Equity Linked Saving Scheme or ELSSs to save taxes under Section 80C of the Income Tax Act.

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Here is an update on our recommended Equity Linked Saving Schemes (ELSS) or tax saving mutual fund schemes. There is no change in the recommendation list this month. That means you may continue to invest and hold on to your investments in these tax saving schemes.

The ELSS category is in the negative territory, offering -7.92 per cent returns, in the last one year. However, you should not be unduly concerned about this short-term performance. If you have a higher risk-tolerance and long-term financial goal, you can still consider investing in ELSS funds to save taxes. Investments in ELSS funds qualify for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

  • 5.99%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 4.7 YearsTime taken to double money
  • 3.09%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • N.ATime taken to double money
A word about the underperformance of two of our recommended schemes, Aditya Birla Sun Life Tax Relief 96 and L&T Tax Advantage Fund, in the short term. Both these schemes have a higher exposure to mid cap and small cap stocks. That explains their lacklusture performance. These two schemes will continue to underperform until these segments bounce back. Though many market pundits have been predicting a revival of small and mid cap stocks, they continue to languish mainly because of the poor sentiment in the market. We are watching these schemes closely.

Investors should remember a few points before investing in these schemes: one, do not invest in ELSS because they have the potential to offer superior returns over a long period. You should invest in ELSS only if you have the risk appetite to invest in an equity scheme. Equity, as you would know, is risky; it can also be volatile in the short term. Of course, it has the potential to offer superior returns over a long period. However, that alone need not be your criteria to invest in ELSSs.

If you don’t have the necessary risk appetite, do not invest in them. Just remind yourself that ELSS funds invest mostly in stocks. Sacrifice those extra returns and be happy with the traditional favourites like Public Provident Fund (PPF), 5-year bank deposit, and so on.

Two, you must have heard the sales pitch that ELSS funds have the shortest mandatory lock-in period of three years among the tax-saving investment options available under Section 80C. Yes, tax saving mutual funds have the mandatory lock-in period of only three years. However, that doesn’t mean you should invest in them with a horizon of just three years in mind. Since they are essentially equity mutual fund schemes, you should invest in them with an investment horizon of at least five to seven years.

Finally, include your ELSS investments in your overall financial plan. They are ideal to meet your long-term financial goals. You need not rush to redeem them as soon as they complete the mandatory lock-in period of three years. You may hold on to these schemes as long as they are performing well. You can sell them a year or two before (even earlier) before the financial goal assigned to them.

If you still want to invest in ELSS funds but don’t know which schemes to choose, here are our recommended Equity Linked Saving Schemes or tax saving mutual funds to invest in 2019.

Best tax saving mutual funds to invest in 2019
Motilal Oswal Long Term Equity Fund
Aditya Birla Sun Life Tax Relief 96
L&T Tax Advantage
Invesco India Tax Plan
Axis Long Term Equity Fund
Mirae Asset Tax Saver
DSP Tax Saver
Principal Tax Savings Fund

We will update you on the performance of these schemes on a regular basis. If you want to know about the methodology employed to choose these schemes, please go through it below:

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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