To avoid duplication, choose ELSS schemes with varying portfolio allocations across different sectors, market capitalisation and stock holdings.
For most investors looking to invest in mutual funds (MF), the bottom line is to know the best MF schemes to invest in. This is not the right approach in selecting the right MF scheme. There is no one scheme that can be called the best as no two schemes can be the same. Each MF scheme varies on several parameters and hence have varying returns. But, yes consistency pays and a scheme that has consistently generated benchmark beating returns over different market cycles can surely be considered as a long term investment. Here, we look at the returns of a few ELSS funds and what things to look at while choosing one or more from the ELSS category. ELSS full form is equity linked savings scheme and it comes with a lock-in period of 3 years and has tax benefit under section 80C of the Income Tax Act, 1961.
Here, we look at the Top 5 ELSS funds that are Rated 5 Star by Morningstar. All the data about the ELSS schemes are taken from Morningstar and are as on 24 July 2019.
Considering the difference in return generated by the ELSS funds, picking an ELSS fund for your tax saving need may not look to be an easy task. Sample this! Over the 3-year period, the best performing ELSS has generated 17.35 per cent while the fund at the bottom of the list has been able to generate 10.88 per cent.
But then, looking at the past performance to invest for the future or to make an assumption that the fund that has delivered a decent performance in the past will continue to replicate the same performance or vice versa is equally wrong. The portfolio composition of the fund, portfolio returns, rankings and the ratings of the MF scheme may change over time and hence a total dependence on them should be avoided.
ELSS Funds returns
Even with higher volatility, Mirae Asset Tax Saver Fund has been consistent in generating positive returns over 1 year, 3 year and YTD returns. Kotak Tax Saver with fairly lesser volatility has also been able to generate positive returns over these periods.
Over a 3-year period, the variation in returns is huge and range between nearly 11 per cent to 17 per cent. Over the 1 year period, the variation seems to have increased with the best performing generating nearly 8.5 per cent while the worst performing fund is nearly at a negative 8 per cent. However, over a longer duration of 5 years, 3 out of top 5 ELSS funds have generated around 13 per cent, while the other two have not been in existence over that period.
Why performance differs
The ELSS funds are not akin to index funds are therefore not supposed to follow index weightage. The performance of the ELSS will solely depend on the fund manager’s call when it comes to allocating funds into different sectors, market capitalisation and stocks. An important difference in the varying returns could be attributed to the portfolio holdings of the respective ELSS schemes including allocation into top 3 sectors and top 10 stocks that each scheme hold.
What to do
Today’s winner may not remain the winner for tomorrow. Top 10 ELSS funds or Top 5 ELSS funds of today may not remain the same after 3 or 5 years. Therefore, it’s better to diversify across 1-3 ELSS schemes rather than relying on only the best performing ELSS schemes. To avoid duplication, choose ELSS schemes with varying portfolio allocations across different sectors, market capitalisation and stock holdings. And, in case the returns are low even after the 3-year lock-in period, continue with the fund once the lock-in period ends. Its always suggested to link your ELSS investment to a long term goal and not invest merely to save tax.