Given the popularity of tax-saver mutual funds and March being a season for last-minute tax-saving deals, many like to explore Equity Linked Saving Scheme (ELSS) funds available in the market. One of the clear pulls to invest in ELSS is the facility to claim a deduction of up to ₹1.5 lakh from one’s gross total taxable income under section 80C every financial year. All you have to agree to is the three-year lock-in for each investment. Instead of considering the best performing ELSS funds today, investors would do well to focus on consistent performance that is better than the benchmark and category over various time periods.

Cut above the rest

Out of the total 42 funds in ELSS category managing Rs 1.5 lakh crore investor assets, there are 28 schemes with a 10 year history. Here we look at a select set of nine ELSS funds that have displayed superior consistency. Over the last decade, these ELSS funds have given higher than average category rolling return and higher than Nifty 500 (TRI) rolling return for one-, three-, five- and seven-year periods. These funds are Canara Rob Equity Tax Saver, DSP Tax Saver, Franklin India Taxshield, ICICI Pru Long Term Equity, Invesco India Tax, Tata India Tax Savings, Bandhan Tax Advantage, Bank of India Tax Advantage and Axis Long Term Equity (see table).

For each of the above-mentioned periods, these nine actively-managed ELSS funds have broadly delivered 1-5 per cent excess return over benchmark’s rolling return. Rolling return analysis helps remove the distortions created by fixed-date comparisons and give a better understanding of the true risk-reward profile. Importantly, a big majority of these nine ELSS funds hasn’t posted negative rolling returns when held for five years. And, the minimum average rolling return when held for seven years is a respectable 7.2 per cent, at least 250 basis points higher than Nifty 500 TRI.

While most of these nine funds have better than category average risk ratios (on three-year monthly basis), the ELSS funds from Bandhan (formerly IDFC MF) and Franklin have captured the highest upside. Tax-saving schemes from Bank of India and Canara Robeco have provided maximum downside protection and aided the cause of investors wanting to play safe.

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Portfolio scan

These nine ELSS funds maintain compact portfolios of an average 55 securities. This is higher than the category average of 49, and also goes to show the higher diversification quotient in these nine ELSS funds. In terms of sectoral exposure too, these funds have allocation to a higher number of sectors (25-30). In fact, a quick glance of ELSS category will throw up many funds with less than 15 sectors.

Banks are the most preferred sector across these funds. Bank of India Tax Advantage has the highest allocation to banks (31 per cent), while Invesco India Tax Plan (17 per cent) has the lowest exposure. IT sector is the second most preferred across seven of nine funds, barring Bank of India Tax Advantage and Tata India Tax Savings. DSP Tax Saver has the highest IT exposure at over 12.3 per cent. While the ELSS category is bullish on Finance sector with average 9.4 per cent allocation, ,most of these 9 ELSS funds appear underweight with the likes of Bandhan Tax Advantage, DSP Tax Saver and Franklin TaxShield having even lower exposure.

In terms of stock-specific holdings, most ELSS funds in the broader category have a mix of HDFC Bank, ICICI Bank, Infosys, Axis Bank, HDFC, RIL, SBI, TCS, L&T and Bajaj Finance as top-10 picks. This trend holds true for most of these nine ELSS consistent fund performers, which shows that tactical allocation may have led to their outperformance vis a vis unique security selection. However, DSP Tax Saver, Franklin India Taxshield and Invesco Tax Plan have more differentiated portfolios than the rest.

As far of m-cap allocation goes, ELSS category has played safe and kept a bulk of portfolio in large-caps (nearly 72 per cent) while the rest is in mid- and small-caps. Bandhan Tax Advantage is an outlier, with less than 60 per cent large-cap exposure but it has nearly 17.3 per cent allocation to small-caps (almost double that of ELSS category). In terms of mid-cap exposure, ELSS category has 17 per cent average weight but Bank of India Tax Advantage has over 23 per cent in this bucket. Canara Robeco Equity Tax has attempted to de-risk portfolio from small-caps by limiting the exposure to 2.3 per cent, the lowest among the nine funds.

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Our take

ELSS funds are a big hit with retail investors given the twin benefits of tax saving and growth potential from equity exposure. Given the tax saving angle, many opt to do last-minute investments but that may not be a wise decision given the volatile nature of markets. Regular investments via SIP route are ideal.

Recently, a couple of passively-managed ELSS funds have been launched. While passive products are thought to score on the cost front compared to active-managed peers, consistency of absolute returns and benchmark-beating gains are important metrics to consider. All the nine funds highlighted are rated between 3 stars and 5 stars by our bl.portfolio Star Track MF rating system), making them safe bets to consider