The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper
Search
+

    Best ELSS or tax saving mutual funds to invest in 2020

    Synopsis

    If you are looking to invest with an investment horizon of five to seven years, you may invest in tax saving mutual fund schemes to save taxes this financial year.

    Getty Images
    If your tax-saving exercise was spoiled by the coronavirus pandemic in the last financial year, you still have time to salvage the situation. You can make investments in certain tax-saving investments like ELSS until July 31 to claim tax deductions for the last financial year.

    The government has extended the last date for making tax-saving investments in the last financial year to June 30 earlier, but it was extended to July 31. The government has announced the measure to deal with disruptions caused by the coronavirus pandemic in the lives of many taxpayers.

    If you are thinking about investing in Equity Linked Saving Schemes or ELSSs to save taxes under Section 80C in this financial year, this may be a good time to do it. Though the stock market has bounced back from its lows it hit in March, it is still proceeding with lot of nervousness about the economic recovery. So, if you are looking to invest with an investment horizon of five to seven years, you may invest in tax saving mutual fund schemes to save taxes this financial year.

    Things You should consider
    • Annualized Return
      for 3 year: 2.61%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 3.8 Years
    Things You should consider
    • Annualized Return
      for 3 year: 4.09%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 3.12 Years
    Investments in tax saving mutual funds qualify for tax deductions of up to Rs 1.5 lakh in financial year. If you have a higher risk-tolerance and long-term financial goal, you can consider investing in ELSS funds to save taxes.

    Here is the monthly update on our recommended tax saving mutual funds for July. There are no changes in the list. All the schemes have managed to retain their spot in the list in July.

    Here are a few points investors should remember before investing in these tax-saving schemes: one, do not invest in ELSS simply because they have the potential to offer superior returns over a long period. You should invest in ELSS only if you have a higher risk appetite to invest in stocks or equity. Equity, as you would know, is a risky asset class; it can also be very 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 the criteria to invest in ELSSs. Especially in the current economic scenario.

    If you don’t have the necessary risk appetite, do not invest in them. Just remind yourself that ELSS funds invest mostly in stocks and you do not have the stomach for extra risk and volatility. Happily sacrifice those extra returns and be happy with the traditional favorites 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. However, you must sell them a few years before the financial goal assigned to them. This is to ensure that your corpus is not adversely hit by a sudden bout of volatility in the stock market.

    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 2020.

    Best ELSS mutual funds to invest in 2020
    • Motilal Oswal Long Term Equity Fund
    • Aditya Birla Sun Life Tax Relief 96
    • Invesco India Tax Plan
    • Axis Long Term Equity Fund
    • Mirae Asset Tax Saver
    • DSP Tax Saver

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

    Methodology:
    ETMutualFunds.com 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.)

    Also Read

    10 Comments on this Story

    dhruve140611 days ago
    The markets are at 10500 levels so there has been a bounce back from the lows of the pandemic . If you look at historical data presently the ELSS funds over a 5-7 yr period have given a annualized return of just 4-5% ! Why would you not invest in PPF which has given a 7-8% return tax free ! Even if you look at 3 year lock in returns they have been negative or close to zero
    Enagula Nath39 days ago
    I'm a supporter of NDA but I feel it is failing in too many fronts and needs to be shown the door.
    The biggest of blunder is shrinking the section of middle class by extorting too much and giving free DBT to people who are not contributing to national growth.
    More and more people prefer not to work and live happily sitting home receiving DBT. This is a demotivation to people who are working hard to earn money respectfully. This free gift given from taxpayers money is unfair and only an election gimmick.
    Ds 69 days ago
    I am a small investor DUMPING my MF Investment Equity or Debt before it get worst.
    The Economic Times