Best ELSS funds to save tax

Inall probability, your checklist for the month's errands reads something likethis: get the house painted before the festive season; refurbish the livingroom; finish the Diwali shopping. Now, add one more to this list: start taxplanning. But it's just October. Why should you start your tax planning rightnow? It should be done at the beginning of the new year when your employersends you the tax deduction notice, right?

Wrong.We have said this before and we are saying it again. Don't compress your taxplanning in the last one or two months of the financial year. Spreading yourinvestments over the year is crucial if you are investing in tax-saving mutualfunds. Stock markets have been very volatile in the past two years. If youdon't want to be caught on the wrong foot, take the SIP route instead of alump-sum investment at the end of the year.

Wehave shortlisted eight of the best tax plans for you. Performance is not theonly reason why these funds have been chosen. Each scheme has been handpickedon the basis of its risk profile, consistency of returns, investment style andquality of holdings. Using the same parameters, we have put these eight fundsin four broad categories (see tables). This is not a ranking of the ELSS funds;all are good performers. Your choice should depend on your risk profile andexpectations.



Large-capsolidity

Slowand steady wins the race. Both Franklin Templeton Taxshield and SBI MagnumTaxgain have a decidedly large-cap orientation. While this means muted returnswhen the markets are rising, it also means a limited downside when the goinggets tough. Franklin Taxshield fell less than the category in 2008, but hasrisen less than the average ELSS fund in 2009. In fact, both the funds haveunderperformed the category in the short term, but outperformed it over thelonger term. Investors can expect returns in line with the broader market.



Incidentally,Magnum Taxgain is the largest ELSS fund, with assets worth Rs 4,434 crorealmost 40% of the ELSS category. It tops the category for a five-year periodwith annualised returns of 35.56%. Don't expect an encore though. It is likelyto give middle-of-the-road returns.



Fast-trackgrowth

Forthose who like to drive a bit faster, the Sundaram BNP Paribas Taxsaver andFidelity Tax Advantage are good options. Though the former has underperformedthe category in 2009, don't let this stop you. The fund has given scorchingreturns over the longer term 19% in the past three years and 33% in the past fiveyears. It has 35% of its assets in mid-cap stocks, which can prove veryrewarding. Fidelity Tax Advantage has matched the category average, but thiscan change to outperformance due to the 25% exposure to mid-caps and 11% tosmall-caps in its portfolio.



Mid-capaggression

Nopain, no gain. If you can stomach a little risk, you have two winners in HDFCTaxsaver and Canara Robeco Equity Taxsaver. Both the funds have a sizeableexposure to mid-caps and small-caps. This aggression has paid rich rewards. WhileCanara Taxsaver has shot up 110% in the past six months, HDFC Taxsaver hasrisen 100%. It doesn't always pan out this way. HDFC Taxsaver was among thebest performing ELSS funds between 2002 and 2005, but slipped subsequently. Ithas now regained lost ground. On the other hand, Canara Robeco Taxsaver hasconsistently beaten the category average and has been the best performer since2006.



Turbo-chargedon small-caps

Small-capstocks are like performance enhancing drugs. In the six funds discussed earlier,the maximum allocation to small-caps was 12%. However, Taurus Taxshield andSahara Taxgain have invested almost 20% in this high-risk zone. This can bevery rewarding when the going is good, but a dream run can easily become anightmare.


Taurus Taxshield has given 76.12% returns in2009, the highest in the category, but its performance has been erratic. Thefund lost 10% in 2006 when the category rose by 30%. The next year, the fundshot up by 111%, while the ELSS average was 57%. Buy if you can handle therisk.

via Indiainfoline