Tax-savings MF: Top 3 ELSS Funds that gave annualised return of over 17%; should you invest?

Tax savings tools: Equity-Linked Savings Schemes (ELSS), also known as tax-saving mutual funds, present the opportoffer investorsor higher returns while also offering tax advantages for investors. Thr, January to March, is a crucial time for many taxpayers who opt to make their tax-saving investments, exploring option and exploretion 80C of the Income Tax Act. 

This section allows for a tax deduction of up to Rs 1.5 lakh per financial year on investments in certain specified instruments. If you are seeking to reduce your tax liability in the current financial year, ELSS or tax-saving mutual funds could be a suitable investment choice. By investing in these instruments, you can avail tax deductions under Section 80C of the IT Act, with a maximum investment limit of Rs 1.5 lakh per year in ELSS, enabling you to claim tax benefits on your investments annually.

ELSS funds require a compulsory three-year lock-in period and have no maximum investment limit. You can begin investing with as little as Rs 500 through either a lump sum or Systematic Investment Plan (SIP). 

Here’s a list of top 5 ELSS funds that one can consider for investment, using data from Value Research.

Quant ELSS Tax Saver Fund – Direct Plan

Investing in Quant ELSS Tax Saver Fund – Direct Plan has —ven to be lucrative ovepast 10 years. For example, if an individual had started a systematic investment plan (SIP) of Rs 10,000 in this fund, they would have accumulated a corpus of Rs 41.94 lakh with a CAGR returns of 23.65%. returnnally, a lump sum investment of Rs 1 lakh in this fund would have also yielded significant returns.

Benchmark: BSE 500 TRI
Riskometer level: Very high
Expense Ratio: 0.59%
10-year annualised return of fund: 20.88%
Benchmark’s annualised returns of 10 years: 13.86%
Fund’s 10-year SIP returns: 23.65%

Bank of India ELSS Tax Saver Fund – Direct Plan

By investing Rs 10,000 through SIP, you could potentially grow your capital to Rs 35.22 lakh over 10 years. If you had made a lump sum investment of Rs 1 lakh a decade ago, it would now be worth Rs 5 lakh with a CAGR return of 17.55%.

Benchmark: BSE 500 TRI
Riskometer level: Very high
Expense Ratio: 0.84%
10-year annualised return of fund: 17.55%
Benchmark’s annualised returns of 10 years: 13.86%
Fund’s 10-year SIP returns (annualised): 20.42%

JM ELSS Tax Saver Fund – Direct Plan

By investing in this fund through a Systematic Investment Plan (SIP) with a monthly contribution of Rs 10,000 for the past 10 years, your investment would now be worth Rs 34.04 lakh.
For a lump sum investment of Rs 1 lakh made 10 years ago, it would now be valued at Rs 4.81 lakh, earning an annualised return of 17.01%.

Benchmark: BSE 500 TRI
Riskometer level: Very high
Expense Ratio: 1.27%
10-year annualised return of fund: 17.01%
Benchmark’s annualised returns of 10 years: 13.86
Fund’s 10-year SIP returns (annualised): 19.79%

Investing in ELSS funds

ELSS funds have the potential to provide higher returns over the long term. This is because tax saving schemes primarily invest in stocks, which historically tend to yield superior returns over extended periods. For instance, the ELSS category has delivered an average return of approximately 16.38% over a 10-year period.

Compared to other tax-saving investments, ELSS funds have the shortest lock-in period of just three years. Government-backed investment options under the 80C basket typically come with lengthier lock-in periods. For example, the Public Provident Fund (PPF) requires a commitment of 15 years with the option for partial withdrawals after six years, while the National Savings Certificate (NSC) has a lock-in period of five years.

If you anticipate requiring access to your funds within three years, ELSS funds would be the most suitable choice. However, it is essential to note that short-term returns may not be as impressive. Equity investing is ideally suited for individuals with a long-term investment horizon of five to seven years, and therefore, investing in equity mutual funds should be considered with this timeline in mind.

Investing in ELSS funds involves investing in stocks, which carries a higher level of risk. It is important to consider this factor, especially for those new to investing in equity mutual funds. Unlike traditional investments like Public Provident Funds or National Savings Certificates, ELSSs do not guarantee returns and may result in losses during a downturn in the market.

An investment of up to Rs 1.5 lakh in Equity Linked Savings Scheme (ELSS) within a financial year is eligible for tax benefits under Section 80C of the Income Tax Act, 1961. Upon selling the units post the three-year lock-in period, any profit gained is classified as Long Term Capital Gain (LTCG). There is no tax imposed on LTCG up to Rs 1.25 lakh in a financial year; however, a 12.5% LTCG tax is applicable on profits exceeding this threshold.