Tax-saving mutual funds, better known as equity-linked savings schemes (ELSS), combine tax benefits with returns, mainly from large-cap stocks, as the category predominantly invests in those.
Though there are many tax-saving schemes, such as the Public Provident Fund (PPF), National Savings Certificates (NSCs), etc. for conservative investors, those looking for higher returns through stocks can consider ELSS, albeit with a higher risk.
As on December 4, 2023, this category has displayed an average return of 20.19 per cent over the last year, offering higher returns than conservative tax-saving options, such as PPF or NSCs. One can also claim a maximum deduction of up to Rs. 1.5 lakh under Section 80C of the Income-tax Act, 1961 for investment in ELSS under the old tax regime.
However, this is not available for those opting for the new tax regime.
Though investors can choose to invest more than Rs. 1.5 lakh, but the excess will not qualify for tax benefits under Section 80C. The minimum investment requirement is Rs. 500, and in multiples of Rs. 500.
Under the Securities and Exchange Board of India (Sebi) stipulations, ELSS funds must invest at least 80 per cent in equity. It can hold 20 per cent in cash or debt and money market instruments.
ELSS funds can invest in large-cap, multi-cap, or mid-cap stocks. While most funds are typically oriented towards large-cap stocks, which are considered to be the least volatile, individual fund portfolios may vary.
The top-performing Quant Tax Plan has allocated 99 per cent of its funds to equity, with 75 per cent invested in large-cap stocks.
ELSS funds offer the shortest lock-in period among all tax-saving options, with a mandatory three-year lock-in period, during which selling your investments is not allowed.
Tax-saving fixed deposits have a five-year lock-in period, while PPF has a 15-year maturity period. NSC comes with a lock-in period of five years. The lock-in period discourages impulsive decisions and thus possibility for compounding gains. Due to the three-year lock-in period, ELSS funds only generate long-term capital gains (LTCGs).
LTCG up to Rs. 1 lakh per year are tax-free, while gains exceeding this limit attract a LTCG of 10 per cent.
The category average return of one year is 20.19 per cent. In the one-year tenure, the top three ELSS funds are Motilal Oswal ELSS Tax Saver Fund, ITI ELSS Tax Saver Fund, and SBI Long Term Equity Fund. They gave returns of 29.77 per cent, 29.54 per cent and 39.43 per cent, respectively.
Moving to the three-year tenure, the top contenders are Quant Tax Plan, HDFC ELSS Tax Saver Fund and Bandhan ELSS Tax Saver Fund. They gave returns of 34.5 per cent, 27.29 per cent and 26.89 per cent, respectively. The three-year category average return stands at 21.44 per cent.
When long-term investments spanning 10 years are considered, Quant Tax Plan, apart from three-year returns also topped this category with 25.51 per cent returns. The 10-year returns stand at 17.39 per cent.