Which Tax Saving Fund / ELSS Fund to invest?

It’s the time of the year when companies start asking employees to submit their proofs for investments for tax saving. And all of a sudden you realize you haven’t actually even thought about it. What follow is chaos & wrong investments.

The storey is almost at this stage for one of my colleagues. We need to submit our investment proofs by end of next week & he is freaking. After talking to few people he’s convinced that ELSS (Equity Linked Saving Scheme) or Tax-Saving Mutual Funds as they are popularly known as is the best way. But the next question is which ELSS to invest into?

As of today there are around 51 open ended ELSS schemes in India and as Financial Year end approaches you would see a lot of New Fund Offers getting launched. So obviously it’s not an easy choice. Let’s see what can be done and how we can choose the best 2-3 schemes from the existing 51.

Step 1: Have a list of All Tax Saving Funds with all details.

There are many websites where you can find such information. My favorite for all kind of information on Mutual Funds is http://www.valueresearchonline.com/.

  1. Open www.valueresearchonline.com and go to Funds Section.
  2. On the right side you have Search tools. Go to Category Compare in this section.
  3. Select Open end and choose Equity: Tax Planning in Objective. and click GO.

Here is list of all Tax saving Funds with all kind of details you require. Since you cannot compare all the funds at a time, you need to short list some funds. I explain this in Step 2.

Step 2: Select Rating as 4 or 5 star funds.

Valueresearchonline rates the funds using some proprietary mathematical model. But 4/5 star rated funds means they have given better risk adjusted returns than their peers in long term. At the end of step 2 we have following 8 funds:

  1. Canara Robeco Equity Tax Saver
  2. Fidelity Tax Advantage
  3. Franklin India Taxshield
  4. HDFC Taxsaver
  5. Magnum Taxgain
  6. Sahara Tax Gain
  7. Sundaram BNP Paribas Taxsaver
  8. Taurus Tax Shield

All the above funds are good funds with at least 3 years of track record. So from here we need to reject rather than select from the list above based on our preferences & criteria.

Step 3: My Rejection Criteria 1: I want Funds with Return Grade: High/ Above Average and Risk Grade: Low/ Below Average only.

So now I have just following 5 funds left with me

  1. Fidelity Tax Advantage
  2. Franklin India Taxshield
  3. HDFC Taxsaver
  4. Magnum Taxgain
  5. Sundaram BNP Paribas Taxsaver

All these 5 funds are great funds to invest and frankly speaking you cannot predict which would give the Best returns after 3 years. But their historical trends and investment style atleast assures that they should give stable above average returns in next 3 years.

Questions Answer Session:

How many Tax Saving Funds I should invest into?

I think there is no right magical number for this. But if you are investing a small amount then pick one fund and if you are doing your entire tax saving by ELSS investment you can go for 2 funds. But more than 2 funds is not recommended in any case as it leads to over diversification, lots of paper work while investing & redeeming and also you would need to track more funds.

What more criteria/preferences can I use to choose 2 funds from your list of 5?

As I said all the 5 funds are great and well proven. You can randomly pick any 2. But if you still want to do more work you can use the following criteria:

Diversification in present portfolio: You should usually diversify from existing fund houses present in your portfolio. So you would like to choose funds from houses which you don’t own or have relatively low exposure.

Asset under management: Usually 500 – 2500 crore is optimum money to be managed.

Fund Manager/Tenure: Some people like certain fund managers. So you can choose on that and also see how long they have been managing this scheme. All the 5 funds here have fund managers with 3+ years of tenure which seems good enough.

Investment Style: You want to choose funds which invest in large/medium/small cap companies or follow value/growth or blended investment principal. All the 5 funds here are large cap.

You can also look at turnover ratio of portfolio, 1 month – 10 years performance and a lot more things you can think about.

All your funds here are large cap oriented while experts say that mid caps would outperform going forward. Give me atleast 1 mid cap oriented fund?

Ok! If you are firm believer of mid-cap storey I have 2 funds for you in order of my preference.

  1. Sahara Tax Gain
  2. Taurus Tax Shield

Both this funds are high return high risk kind of stuff. So know the risk before you invest. Moreover both of these funds don’t offer Online investment facility which I think is very inconvenient.

You said invest in not more than two funds. Give me just two funds you would invest into?

Ok! if you put a gun on my head & say what would you choose? I would go for

  1. Fidelity Tax Advantage: Value investment strategy, Low Turnover Ratio
  2. Sundaram BNP Paribas Taxsaver: More Aggressive, Blended investment rational, High Turnover Ratio

So its kind of diversification for me in terms of Investment Style.

As a disclaimer I am already invested in both these funds 🙂

Should I invest in lumpsum or spread my investment??

SIP (Systematic Investment Plan) is the best way of investment in Mutual Funds. But if you have not started tax saving investment for 2009-10 until now you don’t have much option other than going for lump sum. One thing you can do is spread your investment through out January – March 2010 on a weekly basis. But for this you will have to do it yourself as no fund house has weekly SIP.

But for next finacial year be sure to start your SIP right in April 2010


I just a recent post adding two more ELSS worth considering for investments. They are

  1. Religare Tax Plan
  2. DSPBR Tax Saver

Leave a Comment

Your email address will not be published. Required fields are marked *