Pop quiz. Let’s say on March 2nd, 2015 (5 years ago), you invested ₹100 in the HDFC Tax Saver Fund, and another ₹100 in the HDFC Liquid Fund. Which do you think is worth more today? The Liquid Fund or the Tax Saver Fund?
I even tell you, one of the ₹100 investments has grown to ₹141, and the other to ₹117. Which is which?
The liquid fund beat the pants off the actively managed Equity Fund with an annual return of 7.12% versus 3.26%. Not even close.
Chart below shows how the two investments fared. The red line is the Liquid Fund investment.
Source: valueresearchonline
Finance textbooks say you can’t get more (than risk-free) return without taking on risk. Investors often confuse this to mean you get more return if you take more risk. Two very different things.
Wait. Are we saying you should invest in liquid funds and not Tax Saver ELSS funds? No, we’re not.
Just like if you hopped on a TVS Scooty and I got into an Aston Martin DB5, who reaches our common destination first is not just decided by the horsepower under our respective commands. My ability to pilot the machine will decide when and if I get there at all.
Come financial year-end tax deduction investment proof submission season, you should not click and buy the first ELSS Mutual Fund your Relationship Manager emails or whatsapps you about.
We looked at the available ELSS funds to figure out which ones make the most investment sense in March 2020.
So, how should you pick an ELSS Mutual Fund?
Investment Rationale for ELSS Funds
In an earlier post, we looked at the best place to park money for the short-term. ELSS funds offer the opposite use-case. To invest money that you won’t need for the long-term.
ELSS (Equity Linked Savings Scheme) funds are equity mutual funds with up to ₹1,50,000 in 80C tax deduction in a financial year. In exchange, your money is locked in for 3 years. The gains are however, subject to LTCG applicable when you sell. For a long-term investor, the 3-year lock-in should not be a concern. Picking the best ELSS fund for the right reason is.
How we shortlisted: Simple beats Complex
There are 38 ELSS funds available to investors. Table below shows them ordered in ascending order of launch dates.
Click to enlarge
We looked at 5 parameters to finalize our shortlist of ELSS funds:
- Relative Returns: How often the fund outperformed the category average over 1, 3 and 5-year timeframes
- Returns Volatility: How often the fund offered higher risk-adjusted returns. Risk measured in both overall and purely downside
- Was the fund’s worst rolling 1-year return better than the category average
- Expense ratio
- Finally, instead of drawing a hard cutoff in terms of AUM, we gave a bonus score to funds managing more than 500 Cr and 5,000 Crores
Capitalmind ELSS Funds Shortlist
Our shortlist has 7 funds based on the parameters we identified.
Click to enlarge
Our pick
ELSS funds are essentially actively managed equity mutual funds with a tax advantage built-in. Predicting the best-performing mutual fund is well, impossible . So we consider consistency of performance track record to make our final pick. [Listen to Deepak Shenoy talk about the principles of picking a mutual fund]
We maintain an updated list of our recommendations for various investment questions on the Capitalmind Answers page. [Premium Access Only]
Upgrade to Premium to get access to our portfolios (Long-Term MultiCap, Momentum, Dividend Yield, Fixed Income) by upgrading to Premium. Have questions? Email us at premium [at] Capitalmind [dot] in or on twitter @capitalmind_in
How to buy a Mutual Fund [podcast]
Where should I park money for the short term [post]
