ELSS MUTUAL FUNDS

Equity Linked Saving Scheme (ELSS) is an equity mutual fund that qualifies for tax
deduction and has a lock-in period of 3 years. According to Section 80 C of Income Tax Act
1961, investor can deduct the amount invested in ELSS from their gross total income for the
financial year, subject to a maximum limit of INR 1 Lakh.

An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of
80% in Equity Shares. The balance 20% can be in debt, money market instruments, cash or
even more equity. There is a 3 year lock-in period for the ELSS mutual funds. Post the 36
months, the funds remain invested and work like any other open-ended mutual fund

FEATURES & ADVANTAGES

ELSS invest around 80% to 100% in equity linked instruments and has a lock-in for three
years which means, one can withdraw money only after 3 years from the date of investment.
The minimum investment in ELSS can be as low as INR 500.

Key advantages of ELSS:

• Save tax on initial investment.

• Receive tax-free dividend
• Get tax-free capital gains
• 3 year lock-in period; less compared to other products under section 80 C

The blessing in disguise for ELSS is that the investor’s money stays for long term due to the
lock-in period. Therefore, the fund manager can take bets on stocks in which he has
conviction over long term. As long-term holding period is one of the basic principles for
investment in equities, the lock-in period aids in the fund management process and the fund
manager can deliver better returns owing to defined time period of the cash flows in the fund.

CHART :1 COMPARISON OF ELSS WITH OTHER TAX SAVING

INSTRUMENTS

Minimum Maximum
Instruments Investment (in Investment (in Tenure Return
INR) INR)
Public Provident Fund
500 70,000 15 Years 8%
(PPF)
National Saving Certificate
100 1,00,000 6 Years 8%
(NSC)

5 Year Fixed Deposit 100 1,00,000 5 years 7.5%

Endoment/ Pension Depends upon the Depen

1,00,000 Depends upon the product
Insurance Products product produc
Equity Linked Saving
500 1,00,000 3 years Marke
Scheme
Unit Linked Insurance Depends upon the
1,00,000 3 years (Minimum), Depends upon the product Marke
Plan product
Allows 20% lumpsum withdrawal before the age of
New Pension Scheme 6000 1,00,000 Marke
60 and rest is used to buy Annuity**
Mutual Fund Pension
500 1,00,000 3 years Marke
Scheme

Though returns from ELSS are not fixed, they tend to surpass returns from all other
categories over long term because of the equity element. Secondly, investor can withdraw
after 3 years in ELSS whereas, Public Provident Fund (PPF) and National Saving Scheme
(NSE) have lock-in for 15 and 6 years respectively.

The capital appreciation and dividend from ELSS are also tax-free as compared to NSC and
Fixed Deposits, where interest is added to your gross total income and is taxed as per
marginal tax bracket (highest being 30%). In New Pension Scheme, the maximum exposure
to equity is only 50% for an individual who is below 35 years old whereas ELSS allows
individual to invest 100% into equities.

As per the current draft of Direct Tax Code, the investment in ELSS before 1 April 2012 will
continue to enjoy tax deduction. Post implementation of the Direct Tax Code, ELSS will not
fall under section 80 C but, any capital appreciation on these funds would not be taxed.

SELECTING ELSS

There are in total 48 ELSS from 41 Mutual Fund houses. Though there are numerous options,
we highlight our Top 5 Recommended ELSS based on our in-house mutual fund research
methodology.

• Fidelity Tax Advantage Fund

• HDFC Tax Saver Fund
• Religare Tax Plan
• Reliance Tax Saver
• Sundaram Tax Saver Fund
 PURPOSE OF AN ELSS..

The main purpose of investing for most investors is tax saving. Equity linked saving schemes
(ELSS) are those mutual fund schemes that help you save taxes as well as generate decent
returns

The true measure of ELSS scheme’s worth is consistency. Following four ELSS schemes
make the cut based on their 5 years, 3 years and 1 year performance put together (see tables).
These schemes have remained in the Top 10 ELSS schemes for all these durations :

• Canara Robeco Equity Tax Saver

• HDFC Taxsaver
• Sahara Tax Gain
• Birla Sun Life Tax Relief 96
Investment in ELSS schemes qualify for deductions under section 80C. So, you could max
your returns by investing the entire Rs 1 lakh limit of your Section 80C deductions through
ELSS investments alone. However, be cautious as ELSS schemes have a risk grade higher
than other investments that qualify under section 80C such as life insurance, PPF, NSC, etc.
Another important factor to consider is the lock-in period. ELSS schemes have a 3 year lock-
in, that means you can not sell the investment before this period.

Top 10 Tax Saving Mutual Funds (ELSS)

The following 3 tables lists the Top 10 ELSS Schemes in descending order of their 5 years, 3
years and 1 year returns. This may help you in selecting the best ELSS scheme for your
needs.

ELSS Schemes Ranking based on 5 Year Returns

Return (%) NAV for Plan

1 3 5 NAV as
Rank Fund Name Year Year Year Dividend Growth on Date
11-Jan-
1 Magnum Taxgain 93.29 10.05 32.03 44.4 59.05 2010

Canara Robeco Equity Tax 11-Jan-

2 Saver 97.08 19.21 28.82 20.29 22.28 2010

Sundaram BNP Paribas 11-Jan-

3 Taxsaver 81.83 15.64 28.04 15.03 43.92 2010
 11-Jan-
4 HDFC Taxsaver 106.03 11.2 27.09 62.36 200.48 2010

11-Jan-
5 Sahara Tax Gain 96.88 16.63 25.99 18.99 33.33 2010

11-Jan-
6 ICICI Prudential Tax Plan 120.85 9.38 24.52 18.51 124.12 2010

11-Jan-
7 Franklin India Taxshield 86.18 13.3 23.67 32.85 181.84 2010

11-Jan-
8 Birla Sun Life Tax Relief 96 111.64 10.74 22.39 88.66 10.99 2010

11-Jan-
9 Franklin India Index Tax 79.82 9.33 21.39 40.2 n/a 2010

11-Jan-
10 Principal Personal TaxSaver 93.44 9.76 21.22 91.44 n/a 2010

ELSS Schemes Ranking based on 3 Year Returns

Return (%) NAV for Plan

NAV
1 3 5 as on
Rank Fund Name Year Year Year Dividend Growth Date
11-
Jan-
1 Taurus Tax Shield 106.56 22.69 18.84 23.93 32.76 2010

11-
Jan-
2 Canara Robeco Equity Tax Saver 97.08 19.21 28.82 20.29 22.28 2010

11-
Jan-
3 Sahara Tax Gain 96.88 16.63 25.99 18.99 33.33 2010

11-
Jan-
4 Sundaram BNP ParibasTaxsaver 81.83 15.64 28.04 15.03 43.92 2010
 11-
Jan-
5 Religare Tax Plan 91.49 15.54 n/a 12.86 15.53 2010

11-
Jan-
6 Fidelity Tax Advantage 91.58 14.11 n/a 16.61 18.5 2010

11-
Jan-
7 Franklin India Taxshield 86.18 13.3 23.67 32.85 181.84 2010

11-
Jan-
8 HDFC Taxsaver 106.03 11.2 27.09 62.36 200.48 2010

11-
Jan-
9 Birla Sun Life Tax Relief 96 111.64 10.74 22.39 88.66 10.99 2010

11-
Jan-
10 Magnum Taxgain 93.29 10.05 32.03 44.4 59.05 2010

ELSS Schemes Ranking based on 1 Year Returns

Return (%) NAV for Plan

3 5 NAV as
Rank Fund Name 1 Year Year Year Dividend Growth on Date
11-Jan-
1 ICICI Prudential Tax Plan 120.85 9.38 24.52 18.51 124.12 2010

Birla Sun Life Tax Relief 11-Jan-

2 96 111.64 10.74 22.39 88.66 10.99 2010

11-Jan-
3 ING Tax Savings 107.18 -0.97 17.56 13.09 26.54 2010

11-Jan-
4 DBS Chola Tax Saver 106.86 3.63 n/a 14.28 15.37 2010

11-Jan-
5 Taurus Tax Shield 106.56 22.69 18.84 23.93 32.76 2010
 11-Jan-
6 HDFC Taxsaver 106.03 11.2 27.09 62.36 200.48 2010

Canara Robeco Equity Tax 11-Jan-

7 Saver 97.08 19.21 28.82 20.29 22.28 2010

11-Jan-
8 Sahara Tax Gain 96.88 16.63 25.99 18.99 33.33 2010

11-Jan-
9 DSPBR Tax Saver 95.48 n/a n/a 11.46 15.4 2010

11-Jan-
10 HDFC LT Advantage 93.77 8.01 20.66 38.26 117.3 2010

ELSS Vs ULIPS

Most of the tax saving instruments under Section 80C are savings oriented instruments with
returns after adjusting for inflation either in the negative or slightly positive. The exceptions
to this are the ULIPs (Life and Pension Funds) and the ELSS Mutual Funds. The advantage
with ELSS compared to the ULIPs is the frequency (mostly a single investment or a monthly
investment for a year) and term for investment, for getting good returns.

Why an ELSS?

It has been an established fact that in the long run equity gives a much higher inflation
adjusted returns when compared to any other investment except for maybe real estate. The
top 5 ELSS funds have given returns from 22% to 26% compounded annually over the past 5
years. This is again higher than the market (Nifty) returns over the past 5 years which is at
19%.

ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction
from income up to Rs.1L . This gives the tax payers benefits from 10% to 30% (excluding the
educational cess) based on their current tax slab.

The return (maturity and the dividend [(if opted for]) from the ELSS is also tax free under the
present EEE (Exempt - Exempt - Exempt) regime. However, with the DTC regime tax
benefits could be phased out and is under debate.
The 3 year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund
one tends to withdraw in case of any monetary requirement. The lock-in period also helps the
fund managers to plan their investments better and also to hold on to valuable investments as
they do not have to worry about sudden redemption pressures. The above logic is proved in
the higher returns achieved by the ELSS funds when compared to the market returns. Wealth
creation because of this is much better than most of the other mutual funds. Only some sector
based mutual funds have given better returns than the ELSS fund in the past 5 years.

Options with the ELSS

Salaried people with a tight budget can opt for a monthly investment (SIP using ECS). The
automatic investment from the bank through ECS makes it an easy way to invest.

Those who want an income in between can opt for the dividend option. This is particularly
suitable for senior citizens. Also, the ELSS gives a tax free return compared to a bank or
company deposit, which is taxable.

Limitations with ELSS

The investment in an ELSS cannot be switched or closed before the 3 years are completed
form the date of investment. During market downturns, this becomes a limitation as one can
only sit and watch the funds go down. One has the option of averaging when the market goes
down, but an investment to save tax may not be required in the year in which the market is
going down.

The lock-in works negatively also for the monthly investment because the lock-in is
calculated from the date of the investment and not from the date the scheme was started. This
means that the 12th month's investment can be withdrawn only on the 48th month. This is a
disadvantage compared to ULIPs, where the lock-in is from the date of start of the scheme.
help investors on how to select the top performing funds considering consistent returns, risk
and overall performance. Last minute investors who are yet to do the tax saving for this
financial year (2009-10) or Investors who are already ready for tax planning for the next
financial year (2010-11)

TOP 2 TOP 3 TOP 4 TOP 5

TOP 1
10 Y HDFC Tax Sundaram Franklin ICICI UTI Equity
returns (%) saver BNP Paribas India Prudential Tax Savings
Taxsaver Taxshield Tax Plan
7 Y returns Magnum HDFC Tax ICICI Sundaram HDFC LT
(%) Taxgain saver Prudential BNP Paribas Advantage
Tax Plan Taxsaver
5 Y returns Magnum Canara Sundaram HDFC Tax
(%) Taxgain Robeco BNP Paribas saver
Equity Tax Taxsaver Sahara Tax
Saver Gain
3 Y returns Canara Sahara Tax
(%) Robeco Gain
Taurus Tax Equity Tax
Religare Tax DSPBR Tax
Shield Saver Plan Saver
1 Y returns ICICI HDFC Tax
Canara
(%) Prudential saver Robeco Birla Sun
Tax Plan Equity Tax Life Tax ING Tax
Saver Relief 96 Savings
Scheme Launch date Scheme Launch date
HDFC Tax saver March 1996 Canara Robeco March 1993
Equity Tax
Saver
Sundaram BNP November 1999 Sahara Tax Gain March 1997
Paribas Taxsaver
Franklin India April 1999 Taurus Tax March 1996
Taxshield Shield
ICICI Prudential August 1999 Religare Tax December 2006
Tax Plan Plan
UTI Equity Tax December 1999 DSPBR Tax December 2006
Savings Saver
Magnum March 1993 Birla Sun Life March 1996
Taxgain Tax Relief 96
HDFC LT December 2000 ING Tax March 2004
Advantage Savings
Step 2: From the above shortlisted 14 funds, Remove the fund(s) which:

Criteria Reason Removed funds

Appeared in TOP 5 in These funds did not make it to UTI Equity Tax
5th to 10th year term but did TOP 5 in last 5 years because Savings;Franklin
not make it to TOP 5 in of fund manager change and India
1st to 5thyear term failed to give good returns Taxshield;HDFC
compared to peers/benchmark. LT Advantage
Have not completed At least 5 years performance DSPBR Tax
5th years of launch. must be considered so that Saver;Religare Tax
fund has seen both good and Plan
bad market cycles.
Out of 14 funds, now 9 funds are in the list.

Scheme Fund Benchmark R- Alpha Beta Standard Sharpe

manager Squared Deviation ratio
HDFC Vinay R. S&P CNX 0.94 3.16 0.93 34.46 0.29
Tax saver Kulkarni 500
Since Nov –
2006
Sundaram Satish BSE 200 0.92 5.17 0.96 35.86 0.34
BNP Ramanathan
Paribas Since Sep-
Taxsaver 2007
ICICI Sankaran S&P CNX 0.87 2.69 0.97 37.6 0.27
Prudential Naren Oct Nifty
Tax Plan 2005
Canara Anand N. BSE 100 0.93 9.54 1.02 38.05 0.45
Robeco Shah since
Equity sept 2008
Tax Saver
Magnum Jayesh BSE 100 0.96 -0.12 0.94 34.6 0.2
Taxgain Shroff Oct
2007
Sahara A N Sridhar BSE 200 0.94 6.84 0.97 36.07 0.39
Tax Gain Feb 2007
Taurus Mohit BSE 200 0.87 12.63 1.12 43.39 0.48
Tax Shield Mirchandani
Since Jan
2010
ING Tax Jasmina CNX 0.88 -8.23 1.07 40.72 -0.01
Savings Parekh Dec Midcap
2008
Birla Sun Ajay Garg BSE 200 0.94 1.62 1.14 42.27 0.24
Life Tax Oct 2006
Relief 96
Step 3: From the above 9 funds, select the TOP 5 funds which have high Alpha (Alpha is a measure of an
investment’s performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio

and compares its risk-adjusted performance to a benchmark index.)

Scheme Fund Benchmark R- Alpha Beta Standard Sharpe
manager Squared Deviation ratio
HDFC Tax Vinay R. S&P CNX 0.94 3.16 0.93 34.46 0.29
saVer Kulkarni 500
Since Nov –
2006
Sundaram Satish BSE 200 0.92 5.17 0.96 35.86 0.34
BNP Ramanathan
Paribas Since Sep-
Taxsaver 2007
Canara Anand N. BSE 100 0.93 9.54 1.02 38.05 0.45
Robeco Shah since
Equity Tax Sept 2008
Saver
Sahara Tax A N Sridhar BSE 200 0.94 6.84 0.97 36.07 0.39
Gain Feb 2007
Taurus Tax Mohit BSE 200 0.87 12.63 1.12 43.39 0.48
Shield Mirchandani
Since Jan
2010
* expense ratio for all the above 5 funds is same – 2.5% per annum.

Scheme 1-Y 3-Y % of Risk/Return VR Rating MS * VR –

Rank Rank portfolio Rating
ValueResearch
HDFC 2/34 10/29 Large – Below
Tax saver 49.5Mid – average/Above
*MS – Morning Star
43.48Small average
– 6.98
TOP 5: Taurus Tax
Sundaram 23/34 6/29 Large – Average/Above
BNP 54.51Mid average Shield must settle for
Paribas – 5th position because
Taxsaver 42.82Small
– 2.67 1. Ranking
Canara 3/34 2/29 Large – Average/High was down from 1st to
Robeco 48.25Mid 10th place;
Equity – 2. 40% of
Tax 33.71Small midcap and 37% of
Saver – 18 small cap exposure
Sahara 9/34 4/29 Large – Average/Above make it risky fund.
Tax Gain 49.81Mid Average 3. Compared
– to other 4 funds, R-
36.30Small Squared value of
– 13.89 0.87 tells that this
Taurus 10/34 1/29 Large – High/High fund has less
correlation with that
Tax 22.22Mid
of index.
Shield – 40Small
4. New fund
– 36.94
manager assumed
charge on Jan 2010; He is yet to prove his skills.
TOP 4: Sundaram BNP Paribas TaxSaver must settle for 4th position because

1. Ranking was down from 6th to 23rd place

2. New fund manager must prove his skills.

TOP 3: Sahara Tax Gain must settle for 3rd position because

1. Ranking was down from 4th to 9th place

2. Exposure to small cap is more compared to HDFC Tax Saver. Small cap stocks performance variation is
more (+ve) in bull market and more (-ve) in bear market compared to mid-caps/large caps.
3. Could not make it to TOP 5 in last 1 year returns

TOP 2: HDFC Tax Saver must settle for 2nd position because

1. Ranking was upside from 10th to 2nd place

2. Consistent performance from 10 years and 4 times in TOP 5
3. Fund manager (Since Nov 2006) has proven his skills in bringing this fund from 10th to 2nd place in last 1
year returns
4. Risk/Returns grade – Below average/Above average

TOP 1: Canara Robeco Equity Tax Saver

1. Risk/Returns grade – Average/high

2. Rank 3 in 1 year returns
3. Decent values of R-Squared, Beta, Alpha and Sharpe ratio compared to other 4 funds.
4. Though there is a change in fund manager, this fund performed well consistently in last 5 years

TOP 3 ELSS Mutual funds for 2010-11 are:

TOP 1: Canara Robeco Equity Tax Saver
TOP 2: HDFC Tax Saver
TOP 3: Sahara Tax Gain

CONCLUSION

Overall, we believe ELSS is a good investment vehicle to save tax as well as compound
investment over long term. Investors can gain from the expected appreciation in equity
markets over long term. We suggest investors who have not yet done their tax planning for
the current financial year, to invest in staggered manner over next four months as this will
help them to save tax as well as create wealth over long term.

Simply put, if you fall in highest tax bracket, you can save up to Rs 30,900 by investing in
ELSS! For more details, read on...