Here are the best 5 mutual funds for tax saving

For the past three years, equity-linked saving schemes ( ELSS) funds have topped the charts in the ET Wealth annual ranking of the best tax saving instruments. They score high on almost every parameter. They are very transparent, offer tax-free gains and high liquidity, have very low charges and have given high returns. The only glitch is that they are riskier compared to other tax saving instruments.

Financial advisers and fund houses don’t tire of telling investors to take the SIP route when investing in equity funds. Yet, barely 15% of the total inflows into ELSS funds comes through SIPs. More than 85% of the inflows were onetime or lump sum investments and more than 50% come in the last three months of the financial year. Our calculations show that bunching ELSS investment into the last few months yield lower returns. If you start an SIP in an ELSS fund at the beginning of a financial year and continue for three years, you are likely to earn better returns than if you bunch those investments in the last few months of each financial year.

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The other mistake is that investors take a blinkered view of ELSS funds. Instead of looking at them as a means to grow wealth over the long term, ELSS funds are seen as a short-term tax-saving investments that can be redeemed after three years. Investments are followed by redemptions, so the net inflows into the category are quite low and average folio size remains very low.

Even so, a good ELSS fund can build wealth for investors if held for the long term. Instead of seeing them as tax savers, investors should look beyond and hold for the long term. Fund houses see the lock-in period of three years as a blessing in disguise. “In open-ended funds, 70% of the investment gets redeemed by the end of three years. In ELSS, since investors are around for at least three years, the retention rates are significantly better,” says Chandresh Nigam, Managing Director and CEO, Axis Mutual Fund.