There are 38 ELSS Mutual Funds in India. The annualized median 5 and 3-year returns delivered by the category are 14.4% and 6.1% respectively. However, the best funds have done significantly better with comparable or lower volatility. Read on for our shortlist ELSS funds for 2021 and our final pick.

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Investment Rationale for ELSS Funds

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 ELSS Funds

There are 38 ELSS funds available to investors. Many investors make the mistake of thinking of them as one undifferentiated category like PPF (Public Provident Fund). Not surprising given the name ELSS (Equity Linked Savings Scheme) seems to suggest a certain permanence of returns. That is far from the case.

ELSS funds are equity mutual funds, currently all actively managed. i.e. a Fund Manager decides what stocks to buy and own on your behalf.

The table below shows the 38 ELSS mutual funds in descending order of the time they have been around. Quantum Tax Saving Fund is the oldest at 12 years and ITI Long Term Equity Fund is the newest having been launched in October 2019.

Table below shows historical performance of the funds ordered same as the above table.

The rows in red are special mentions: Nippon India Tax Saver ELSS and HDFC Taxsaver Fund, both have delivered thoroughly ordinary returns over the last several years and yet manage significant amounts of money. Look at their year-wise returns and its apparent that 2014 and 2017 performance has a lot to do with their AUMs. A clear warning against chasing last years hot fund.

We looked at 4 parameters to shortlist ELSS funds we think make sense:

Relative Returns: How often the fund outperformed the category median

Returns Volatility: Measured by the volatility of annual returns by average returns

Expense ratio

AUM as a soft cut-off – a fund that’s been around for a few years and has negligible AUM is likely not getting a lot of attention

Our shortlist of ELSS funds for 2021 looks like this in no particular order:

Invesco India Tax Plan

Axis Long Term Equity

UTI Long Term Equity

Kotak Tax Saver

Canara Robeco Equity Tax Saver

Mirae Asset Tax Saver

Our pick

38 funds down to 6. It’s easier to identify the funds to definitely stay away from than the funds to definitely buy.

Of the 7 funds in our 2020 shortlist, 5 funds make it to the 2021 list.

Our pick in 2020 was the Axis Long Term Equity Fund. We’d be comfortable with continuing to own that fund.

If we were making fresh ELSS investments, we’d pick the: Mirae Asset Tax Saver Fund.

This was first published in Capitalmind