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Top five tax-saving mutual fund schemes
March, 31st 2014

Tax planning becomes the top priority for individual tax payers as the financial year draws to an end. Several types of investment qualify for tax break under Section 80 C of the Income Tax Act, which enables individual tax payers, in the highest tax bracket, to save Rs. 30,000 on investment of Rs. 1 lakh.

This article is about Equity Linked Savings Scheme (ELSS) or tax saving mutual fund plans that qualify under Section 80 C. One can invest up to Rs. 1 lakh in these mutual fund schemes every year to save taxes. The amount invested will be deducted from taxable income for the purpose of calculation of tax liability.

ELSS invests a majority of its corpus in equity and equity related products. It comes with a lock in period of three years and is suitable for investors having a high risk profile. ELSS schemes are open ended, that is, investors can subscribe to the fund anytime.

However, zeroing in on the right mutual fund is a difficult proposition for retail investors. To make things easier, we have analyzed 46 different schemes among the available mutual fund tax plan schemes and have selected the top five funds for investment. We have taken those funds which have a track record of minimum 5 years.

Funds have been analyzed on the following three criteria,

1. Return: We have calculated the return of various funds over a 3-year and 5-year period. A fund manager can outperform the markets by chance for a year or may be for two years, but chance alone cannot lead to outperformance over longer terms. So, 3-year and 5-year returns for all the available funds have been compared with Nifty return and the top five have been selected.

2) Risk Parameters: Risk has been given utmost importance in the selection criteria because higher returns can be earned with higher risk. The fund manager might have outperformed the market simply by selecting high beta stocks in his portfolio. High beta stocks are those whose price volatility is higher than the overall market or index volatility. In order to filter out the high return funds with low risk, we have compared all the funds on measures like variance, standard deviation, downward deviation and beta of the portfolio. We have also taken portfolio turnover ratio and expense ratio into consideration for selecting the top five funds.

3) Risk adjusted return parameter: Under this criterion, we have adjusted the funds' return against the risk taken by the fund manager. Risk adjusted return signifies how much excess return a fund manager has generated by taking one unit of risk. Based on this criterion we have judged whether the risk a fund manager has taken is worth taking.

Generally, mutual fund schemes are available in three different schemes - growth, dividend and dividend re-investment. The growth scheme has been considered for the purpose of the above comparison.

The top five mutual fund schemes based on the above three criteria are:

Note:-the returns mentioned above are calculated as of 14th march 2014 and the NAV details have been taken from value Research website.

Retail investors should consider investing in the direct plans of these schemes because direct plans give slightly higher return (0.2-0.6 per cent on an annual basis) in comparison to growth plans due to lower distribution cost.

 
 
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