- Wealth PMS (50L+)
ELSS (Equity Linked Savings Scheme) funds are equity mutual funds that get you up to ₹1,50,000 in 80C tax deduction in a financial year when you file your returns in the old regime.
In exchange, your money is locked in for three 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.
If you are filling your returns in the new regime, then 80C deductions are not available. If not for tax exemption purposes, it makes little sense to buy ELSS funds since they generally have higher expense ratios and a 3-year lock-in.
If you want to zero in on which ELSS fund to invest in for 2024, your search should end here.
Translation: Mutual Funds are the right choice of instrument, but there are just too many of them.
Picking the right mutual fund from a bunch of similar-sounding, “smartly named” funds is so confusing that many of us just give up and go with the most popular one. Or the one with the best one-year returns.
So rather than trying to find the “right choice” by evaluating each mutual fund qualitatively, we have devised a robust quantitative filtering mechanism to arrive at a set of good enough picks.
This mechanism helps us objectively evaluate and gives us a shortlist. Eventually, we are left to pick a fund from a few funds that have passed all the rejection criteria.
How should an investor pick from the several options available?
We apply five quantitative criteria on 34 investable ELSS schemes to filter out the funds we don’t want to consider.
1. Longevity or Track Record. Ideally, we’d want at least eight years of performance to represent a business cycle of good and bad years, severely restricting our selection. So, we’ll relax this criterion.
2. AUM Health. Expense ratios tend to be in the 1% to 2% range. A fund with a low AUM will struggle to apply high-quality research fund management resources if its AUM is inordinately low.
But then, some fund houses have tremendous reach because they are part of a massive retail banking network. Others have built up AUM over time, while others are relatively new entrants and do not have the network advantage.
3. Outperformance versus the category (In the top half). Percentage of time where the rolling 1-year return of the fund outperformed the category median.
4. Underperformance versus the category (In the bottom quartile). Percentage of time where the rolling 1-year return of the fund was in the bottom quartile of all funds in the long list.
5. Volatility. The annualised standard deviation of daily returns is normalised for the fund’s median 1-year performance. So, lower volatility but low-return fund gets penalised compared to a higher-return fund of similar volatility.
Result: 8 out of 32 funds are shortlisted for the final selection set.
After weeding out funds we don’t want, we will analyse the fund’s returns over different periods.
An excellent three or five-year CAGR relative to the benchmark can come in two ways:
By avoiding the second type of fund, we hope to reduce the probability of deep drawdowns that will cause discomfort, leading to selling low and wondering where to deploy next. Especially for ELSS, remember that you are locked in for three years, so you don’t want to be stuck with a fund that you may feel like replacing later.
We do this by going beyond discrete point-to-point returns and looking at rolling returns and how a fund does relative to its peers.
PPFAS Tax Saver makes the cut due to solid performance and consistency:
Being able to avoid poor relative performance, while not necessarily being the best each year, means you stand a great chance of top-decile performance over the long run.
We changed our pick after three years and are now moving to the PPFAS Tax Saver Fund.
Mirae and Quant ELSS Tax saver run in a very close second, given their relative performance to the category since its inception.
Here’s a list of all 32 schemes, along with the metrics we used for this analysis (funds with a vintage greater than three years)
(Click on the image to enlarge)
We have been publishing research reports for ELSS picks for each FY since FY 2019. Here’s how those picks have done until now:
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