Dec 7, 2009

Best Tax Saving (ELSS) Mutual Funds: FY 2009-2010

Photo by Tony Blay

In January 2009, I published a list of seven best ELSS (equity-linked savings scheme) funds for the purpose of tax savings under section 80C. Further, out of those seven tax planning mutual funds in India, we selected top 3 schemes on the basis of their consistent outperformance during past 10 years.

The following were the top 3 ELSS Funds:

1. Canara Robeco Equity Tax Saver
2. Sundaram BNP Paribas Taxsaver
3. Sahara Tax Gain


So, now that almost a year is over, let’s review the performance of tax saving mutual funds and see whether those are still the top rankers or, is there any new addition or deletion? Put another way, which are the current best tax planning equity mutual funds in India for FY 2009-2010 having potential to deliver top returns over next 3-5 years?


Out of the previous seven 5-star and 4-star rated schemes by Value Research, a mutual fund rating agency, Magnum Taxgain and Sundaram BNP Paribas Taxsaver stands downgraded from 5-star to 4-star; Principal Personal Tax Saver rating has been lowered from 4-star to 3-star (hence removed from the list) while Canara Robeco Equity Tax Saver has got its rating improved from 4-star to 5-star. There are two new additions to the league of ELSS toppers: Tauras Tax Shield and Fidelity Tax Advantage. Revised current list (as on Nov 30, 2009) of top tax saving mutual funds in India is as follows:

Best Performing ELSS Funds
a) Fidelity Tax Advantage (5 star)
b) Canara Robeco Equity Tax Saver (5 star)
c) Magnum Taxgain (4 star)
d) Sundaram BNP Paribas Tax Saver (4 star)
e) Franklin India Taxshield (4 star)
f) HDFC Taxsaver (4 star)
g) Sahara Tax Gain (4 star)
h) Tauras Tax Shield (4 star)

Further, talking about the best of the best, out of the top three ELSS funds I recommended, two are still maintaining their top position.

While the Canara Robeco Equity Tax Saver is performing quite well (despite change of fund manager 1-year back) and is in tune with its excellent long term performance, there is some slippage in the performance of Sundaram BNP Paribas Tax Saver but let’s hope it’s a temporary phenomenon and the fund will soon recover (but still it can no more claim to be in the league of top three ELSS). Coming to Sahara tax gain, delivering consistent above average returns there’s no change in its 4-star status.

Our choice has been vindicated by the ET Quarterly MF Tracker (Sept 09 ratings) according to which the only two schemes to get Platinum rating in the equity-linked saving scheme (ELSS) category are Canara Robeco Equity Tax Saver and Sahara Tax gain. So we get additional assurance that our choice of best of the best among the tax saver equity mutual funds (ELSS category) is in fact right.

Next question is: Which new ELSS scheme should take this coveted third position? Whether HDFC Tax Saver or Fidelity Tax Advantage (a new entrant)? My vote goes to HDFC Taxsaver, despite comparatively better 3 year performance by Fidelity Tax Advantage (and its 5 star rating). There are basically two reasons: first is consistent top performance by HDFC Taxsaver over a period of 10 years except in the year 2007 (the only year in its history when it performed miserably and failed to beat its benchmark index), while Fidelity Tax Advantage is a new entrant yet to complete even 5 years. Second reason is that the current performance (trailing 1-Yr returns as on 30 Nov 2009) of HDFC Taxsaver(108.73%; 4/30) is a lot better than Fidelity Tax Advantage (91.92%; 13/30). The only thing I don’t understand is why the HDFC Taxsaver scheme is awarded ‘Silver’ rating (which indicates average risk-adjusted return performance) by the ET MF Tracker Sept 09.

Won’t it be an injustice to Tauras Tax Shield, another promising ELSS with the highest Sharpe Ratio (i.e., delivered best returns per unit of risk taken) and highest alpha (i.e., excess returns on and above the risk-adjusted returns) among all the tax saving mutual funds?

No, because Tauras Tax Shield is a highly risky scheme in the ELSS category: high risk grade (only ELSS among the top 8), mid-cap orientation, beta of more than one and highest turnover ratio. While it was the best performing ELSS in the year 2007 ( 111.69% returns outperforming its benchmark index [BSE 200] by a huge margin of 51.25%), it was the worst performing tax saving fund in the year 2006 (returned negative 10.13% as against around +40% delivered by both BSE 200 and Nifty). OK, that’s 2-years back, what’s about the recent performance? See again that although it’s ranked 6/30 on the basis of 1-yr trailing returns (as on 30 Nov 2009), but last 6 months performance (16.03%, [Rank 32/36] against the category average of 21.72%), is again poor. Put simply, there is too much variation in the performance of Tauras Tax Shield which is not good.

Here’s the latest list of TOP 3 ELSS Funds for FY 2009-2010.

Top 3 ELSS Funds
1. Canara Robeco Equity Tax Saver
2. Sahara Tax gain
3. HDFC Taxsaver

Do you agree?


Also see:

1. Why must you Choose the Best Equity Funds?

2. How to Invest in Best ELSS Mutual Funds?

3. Review of Birla Sun Life Tax Relief '96

12 comments:

  1. I am not comfortable with Fidelity Tax Advantage's performance. Agreed, that it protects downside very well. But it fails to take advantage of rising market and is left behind, more often than not.
    I am more comfortable with HDFC Tax Saver

    ReplyDelete
  2. Srikanth: Although Fidelity Tax Advantage is rated 5-star by Value Research, I’ve not included it in the list of Top-3 ELSS. We need to watch Ranbir’s performance for some more time before we can say that he is in fact a good actor.

    Regarding HDFC Tax Advantage, you’ve not mentioned any reason for your discomfort.

    ReplyDelete
  3. Srikanth: Sorry for not properly reading your comment. It just came to my notice that you wrote the word ‘comfortable’ regarding HDFC tax saver while I misread it as ‘not comfortable’. The error is regretted.

    ReplyDelete
  4. Hey Fisher,

    Thanks for the lovely article. Looks like the index is quite high. HDFC Taxsaver NAV is currently at its peak NAV. Would you still recommend buying something at this price?

    ReplyDelete
  5. Vicky: While investing in mutual funds, decision should never be based on the NAV. For more details, see “6 Myths about Mutual Fund Investing”.

    ReplyDelete
  6. Completely Agreed. Thanks for the analysis

    ReplyDelete
  7. Fantastic article and indepth analysis (using spreedsheet) of the top ELSS funds.

    I was looking for an article that would explain me what ELSS was so a short description on the top of the article (one para) would have been great.

    The article shows bang on, on what most people want i.e. what are the best elss funds out there and why to go with them.

    I am subscribing to your rss.

    Hoping that your would keep on publishing such fantastic articles in future too.

    ReplyDelete
  8. Hi,

    I am looking forward to invest in ELSS, is Canara Rebaco fine, & which option should i go for - growth or dividend?

    I will be taking SIP 2000 month.

    Thanks.

    Please mail me:
    sidd.chauhan@gmail.com

    Siddharth.

    ReplyDelete
  9. AnonymousJune 13, 2010

    Excellent info and site all together. Thanks for sharing your in depth knowledge.

    I have one question.

    Would you suggest purchasing units of any MF at the time when its NAV is low (assume I opted for SIP for this MF) ? I do this often to increase my balance units, but I think this would extend your lock in period.

    Shekhar

    ReplyDelete
  10. As per me SBI Magnum Tax Gain - Growth is the best currently.

    ReplyDelete
  11. suggest 3 elss as on date

    ReplyDelete
  12. Why you have not spoken anything about Quantum Tax Savings Fund? i think thats also performed well incomparison with the above funds just check out the details at www.QuantumAMC.com.

    ReplyDelete

You’re welcome to post a comment if you’d like to air your views, or if you’ve any further question to ask, but please stick to the topic and don’t forget to write your name.