As we approach the last leg of another financial year, tax saving options that promise good returns are in the limelight for investors who are in a rush to save tax, and submit tax declarations.
Wealth managers say diversified equity funds that come with additional tax benefits could be a good option as these equity linked saving schemes (ELSS) comes under the section 80C and investment of upto Rs 1.50 lakh in these tax saving mutual funds can be deducted from your gross total income.
These funds have a 3-year lock-in period from the date of investment. However, there is no restriction on redemption once the lock-in period is over. “It is a good option for those seeking tax benefits along with higher returns,” said Naveen Kukreja, managing director at Paisa Bazaar.
Renu Pothen, research head, Fundsupermart.com, said, “The investor can invest upto Rs 1,50,000 in a tax saving fund and save upto Rs 46,350, if he/she falls under the highest tax bracket.”
As tax saving funds invest into the equity markets, they are subject to market volatility. In such a scenario, the returns of the fund will also fluctuate depending on the volatility. Pothen said, “The exemption available in tax saving funds and other tax saving instruments is the same, but the main difference is that the tax saving mutual funds invests into equities. In the long run, equities are known to perform better than fixed income instruments and are known to create wealth for investors.”
PPF Vs Tax Saving Mutual Funds
According to market experts tax-saving mutual funds are better option than PPF. Latter is a fixed income instrument, the returns will never be able to beat the equity investments that tax savings schemes are into. PPF is less volatile and is a safe instrument vis-à-vis tax saving mutual funds. “The benefit of investing into a volatile instrument like tax saving mutual fund is that, it not only has the potential to generate better returns compared to PPF but will also help investors in achieving their goals if these are held for a long time,” said Pothen.
Experts say an investor can take an exposure into a tax saving fund for a time period of more than 3 years. If the selected fund is performing well, then the investor need not exit the same after 3 years because it is a known fact that equity investments held for more than 5 years not only generate better returns but also help the investors in achieving their goals.
With the help of market experts we identify 5 tax saving mutual funds which you can buy in the present market scenario.
1) Axis Long Term Equity Fund
Recommended By: Fundsupermart.com
Investment Rationale: The fund has a mandate to invest across the market capitalisation spectrum and uses the bottom up approach to select stocks. This fund follows a buy and hold strategy, this can be seen from the fact that more than 50 per cent of the stocks in the portfolio have been held for 36 months (Feb 2013-Jan 2016).
2) Tata India Tax Savings Fund
Recommended By: Fundsupermart.com
Investment Rationale: This is an actively managed fund which moves across the market capitalisation spectrum depending upon the opportunities available to the fund manager. One of the biggest usp of the fund is that it is the best performer when markets are most volatile.
3) Franklin India Tax Shield
Recommended by: Vidya Bala, head of mutual fund research, Fundsindia.com
Investment Rationale: This fund scores for its consistent and low volatile performance and would be among the best picks in the tax-saving fund space for those new to equity investing. Franklin India Taxshield is a large-cap oriented tax-saving funds. Even in its mid-cap picks, the fund opts for quality names and not risky ones. A limited portfolio churn and a focus on quality is what sets this fund apart. The fund has consistently beat its benchmark CNX 500, as well as its category, almost all the time on a rolling 3-year return basis. This is despite the fund’s not upping exposure to mid-cap stocks during rising markets, even while its peers tend to do so. It is extremely adept at containing losses, and scores well compared to its category on risk-adjusted returns. The fund, therefore, suits those with a moderate risk profile.
4) IDFC Tax Advantage (ELSS)
Recommended by: Fundsindia.com
Investment Rationale: This fund is benchmarked against the BSE 200 index, and has outperformed its benchmark convincingly over the past 5 years. Although the fund is predominantly large-cap focused, it does take quite a bit of exposure to mid-cap stocks. However, it still manages to keep volatility low since it takes higher cash calls, up to 10 per cent of its portfolio, during uncertain markets or when markets turn expensive. The fund too has a compact portfolio of about 35 stocks but that means For investors with a moderate risk appetite, the fund is a good fit.
5) ICICI Pru Long Term Equity (Tax Saving)
Recommended by: FundsIndia
Investment Rationale: This fund has a very long track record, having been launched in 1999. It therefore has had opportunity to prove its mettle over several market phases. The fund is suitable for those with a higher risk appetite as it can be a bit volatile in the short to medium term, especially in bear markets. The volatility stems from allocating a good 25-35 per cent of its portfolio towards mid-cap stocks. In bear markets, it is not known to be among the best in containing losses. However, this is adequately made up in the long term with superior returns. The fund takes slightly contrarian views as well. This may result in some of its picks underperforming in the short term.