The best MF tax savers

It's not too late to plan your taxes. Here's how to get started with mutual fund tax-saving schemes.

Although it's an all year activity, many of us leave tax planning for the last minute. So if you haven't started yet, though we're still a good four months away from the March 31 deadline, it's better to avoid the last minute scramble, especially as tax planning involves investments that require you to take well-informed decisions. It also entails balancing your chequebook so that you have enough to manage your household budget. A systematic investment plan (SIP) that's easy to manage and which has a superior return is what you need.

Tax-saving funds are tailored exactly for you. They invest in equities which give superior returns to other asset classes like debt, gold and commodities. What’s more, an investment entitles you for a tax deduction under Section 80C of up to Rs 1 lakh. Besides, the investment under the scheme has to be locked in for three years, which is a sufficient time to grow your money.

For the past 10 years, Vijay Kumar Goel, Senior VP and Head (PMS & Third Party Distribution), Motilal Oswal Securities, has been investing regularly in equity linked savings schemes (ELSS) through a SIP. Four of the 11 funds he has invested in are tax-saving funds. Says Goel: “The ELSS funds account for about 4-5 per cent of my entire equity portfolio. They not only provide tax breaks, but also help create wealth over a long period as they have a three-year lock-in.”

When the finance minister increased the investment limit in taxsaving schemes from Rs 10,000 to Rs 1 lakh two years ago, ELSS emerged as a compelling tax-saving option, and they are steadily gaining popularity. Since October 2006, assets under management (AUM) of ELSS funds nearly doubled to Rs 14,593 crore from Rs 7,697 crore. ELSS funds account for 3 per cent of the total AUM as compared to 2 per cent last year. After adjusting for the mark-to-market increase of about 47 per cent, the incremental flows into ELSS funds increased by a sturdy 43 per cent, suggesting an increasing appetite for the funds among tax savers.

Since ELSS fund managers have a window of investing for about three years, they tend to invest in some of the little-known stories in the market. So even while these funds may underperform in the short run, they can still catch up in the long run. Says Goel: “As they have a threeyear lock-in, the fund manager has the leeway to take concentrated calls in mid-size stocks that could turn to tomorrow’s large caps.”

While the frontline 30-share BSE Sensex gained 53 per cent till October 30, the average returns recorded by tax savers was a shade lower at 47.3 per cent. Sixteen (or 41 per cent) out of the 38 funds bettered the average performance of this category of funds. But, more importantly, 13 funds beat the bellwether index by a decent margin. Birla SunLife Tax Relief 96 has been the top performer with returns of 70 per cent, followed by Principal Taxsaver which returned 66 per cent. Taurus Libra Taxshield (62.4 per cent), Sundaram BNP Paribas Taxsaver (62 per cent), Escorts Tax Plan (59.5 per cent) and DWS Tax Saving Fund (59.2 per cent), too, out-performed the Sensex.

What’s more, their improved performance is not going unnoticed. These funds are increasingly finding takers among mainstream investors and not just the tax saving community. Rajesh Saluja, CEO, ASK Wealth Advisors, says: “We don’t see ELSS funds just as a tax saver, but also recommend some of them as regular investments if they meet our investment philosophy and match the asset allocation needs of the investor.” Investors, however, should limit their investments here. Says Goel: “Allocations to ELSS funds should not exceed 10-15 per cent of one’s total equity portfolio as ELSS funds are illiquid having a threeyear lock-in.” On the flip side, as it’s a close-ended fund, investors can’t redeem the funds in a falling market and, therefore, remain invested for longer periods and are not worried about the volatility.

For your tax needs, Goel and Saluja recommend six ELSS funds to invest in. Except for Fidelity Tax Advantage Fund and Reliance Tax Saver Fund, others have a long five year track record. Put together, these funds have recorded an average one-year return of 52 per cent, matching the performance of the Sensex. These funds have a decent blend of large, mid- and small cap stocks. So go ahead, start your SIP and get the tax breaks.