Three tax saving funds to buy

If you tend to leave your tax-saving investments to the last minute, equity linked savings schemes (ELSS) from mutual funds are a handy option.

You can invest as little as Rs 500 in them, you need not commit to yearly payments and the money is locked in just for three years.

This year, ELSS funds look more attractive than usual because of buoyant stock prices which have helped the top ones notch up gains of 14 to 16 per cent . But if you are tempted to invest in ELSS funds, it is best to choose carefully at this juncture. No point in investing for tax breaks, only to find your capital eroded by stock market swings three years down the line. We put the entire lot of ELSS funds through three hurdles, to shortlist the funds you can buy.

Long-term performers

ELSS funds as a category have not fared as well as plain vanilla equity funds over the long term. This is despite the lock-in period which should help fund managers deliver better returns through a ‘buy and hold’ strategy.

Therefore, the five-year returns on the ELSS category stands at an annualised 2.2 per cent (as on February 20), compared with 4 per cent for plain vanilla equity funds. The average, however, masks big differences between the good, the bad and the ugly.

But there are ELSS funds which have bettered their peers by a wide margin and stayed ahead of the Sensex over the last five years. ICICI Pru Tax Plan, Franklin Taxshield and Religare Tax Plan top the rankings, with five-year annual returns of 7-8 per cent.

At the other extreme, Escorts Tax Plan, Principal Tax Savings and DWS Tax Savings feature the lowest (negative) five-year returns.

Limiting losses

But delivering returns over the long term isn’t the only criterion to look for. Ideally, a tax saving investment should not expose your portfolio to unnecessary risk during market meltdowns.

Therefore, we checked out ELSS performance during market crashes. There were two such crashes in the last five years. Many ELSS funds lost much more value than the indices both in 2008 and 2011.

There were, however, a few which managed to keep their losses to a minimum — much lower than the markets — in both the bear years. These were Can Robeco Equity Taxsaver, Quantum Tax Saving Fund, Franklin India Taxshield and Tata Tax Saving fund.

Large-cap bias

Finally, your decision to invest in a tax saving fund should factor in its current portfolio. The steep market rise of the last one year has led to stocks turning more expensive, especially because corporate profits have not kept pace.

Valuations of mid- and small-cap stocks match or even exceed those of large-caps. Under the circumstances, funds that invest mainly in well-known large-cap stocks appear less risky than others.

Applying this yardstick to ELSS funds which made it through the above two filters, Can Robeco Equity Tax Saver, Franklin India Taxshield and Quantum Tax Saving Fund appear to be the best bets for this year.

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