The average return of tax saving ELSS mutual fund category over the 5 year and 10-year period is about 15 per cent and 13 per cent respectively.
The top ELSS funds as of today may not be the winners in the next year or 3 to 5 years from now.
The tax-saving season is going to end on March 31 and many taxpayers might be looking to invest in Equity Linked Savings Schemes (ELSS) to save tax for the financial year 2020-21. While selecting the ELSS, many investors may pick the scheme based on recent performance and ignore the long-term performance of the scheme. However, the top ELSS funds as of today may not be the winners in the next year or 3 to 5 years from now. Some of the top funds may not be even in the top quartile a few years from now. It is, therefore, better to be diversified among 2-3 ELSS schemes based on their market cap and exposure to the different sectors or industries.
The average return of the ELSS category is about 40 per cent and 11 per cent over 1 and 3 years, respectively. As the lock-in period is of 3 years, many investors exit or redeem their ELSS units. It is often suggested by financial planners not to exit after the lock-in period has ended.
Even if the returns are low because the market has turned turtle after the lock-in has ended, the investors may continue without exiting. As and when the market rises and NAV of schemes increases, the exit may be planned. The investors may continue investments in ELSS as open-ended scheme and use the funds for their medium-term goals.
The ELSS funds are available both in regular and direct plans and come with growth and dividend options as well. The average returns over the 5 year and 10-year period is about 15 per cent and 13 per cent respectively.
Some ELSS funds to consider:
Axis Long Term Equity Fund
5-year CAGR – 18.26 per cent Industry allocation – Financial, Services, Technology,
BOI AXA Tax Advantage Fund
5-year CAGR -20.04 per cent Industry allocation – Financial, Chemicals, Technology,
Canara Robeco Equity Tax Saver Fund
5-year CAGR -19.55 per cent Industry allocation – Financial, Technology, Automobiles
DSP Tax Saver Fund
5-year CAGR -18.34 per cent Industry allocation – Financial, Technology, Energy
Mirae Asset Tax Saver Fund
5-year CAGR – 24.16 per cent Industry allocation – Financial, Technology, Energy
( As on March 15, 2021)
The actual selection of stocks within the industry also matters. In addition, diversification across large-mid-cap stocks also determines the returns in the long run. There are more than 35 ELSS funds in the market today and choosing the best one will be a futile exercise as past performance will not determine the future returns in mutual funds. It is better to stick with funds that have beaten their benchmark consistently over the long term.