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What are the best tax-saving ELSS mutual funds in 2023?

Posted on 01 Jan 2023
Author: Sayan Sircar

Tags: Choosing Investments ; Tax ; Mutual Funds

5 mins read

This post sifts through 38 options to find the best ELSS funds for investing in 2023.

What are the best tax-saving ELSS mutual funds in 2023?

Disclaimer: The fund names mentioned in this article are not recommendations to invest/not invest in those funds. Please perform adequate due diligence before making any investments.

What is ELSS?

Equity Linked Savings Scheme (ELSS) funds are mutual funds that are an eligible scheme to get tax deduction under Section 80C of the Income Tax act. 80C allows you to get a deduction of ₹150,000 per financial year if you are in the old tax regime, which leads to a saving of ₹46,800 tax per year in the highest tax bracket.

ELSS funds have a mandatory 3-year lock-in for every purchase. So, if you are investing in a SIP form, then keep in mind that every SIP installment is locked for three years from the date of purchase.

Many investors use the 1-lakh equity LTCG tax exemption to roll their ELSS funds every year. This form of tax harvesting involves selling the oldest ELSS units (more than three years old) and reinvesting them immediately in the same or another fund.

Instead of going through a mad last-minute rush to invest in ELSS due to the tax-proof submission deadline, this post will help investors to shortlist funds for review.

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Filling 80C without ELSS

Investments in ELSS funds should be only to fill any remaining 80C limit and should be as per the equity allocation of your goals. If your 80C is already full with ₹1.5 lakhs of investments, please ignore ELSS funds. This recommendation for avoiding ELSS comes from the fact that these are active funds and leads to portfolio clutter if not reviewed properly. Related: Are you checking the performance of your funds regularly?.

We will use a waterfall approach to fill the 80C limit (see this for details on 80C investing) by moving to the next step only if anything is left within the 150,000 limits:

Step 1: Mandatory EPF contribution if you are salaried
Step 2: Life Insurance premium - Why you should have term insurance?
Step 3: Housing loan principal
Step 4: Children’s school tuition fees
Step 5: Long-term investments - NSC, PPF, ELSS, NPS, 5-years tax saving FD etc.

ELSS should be considered as a part of investing for long-term goals as per the right asset allocation. This article talks about asset allocation for goals where equity allocation can be appropriate: What should be the Asset Allocation for your goals?.

Choosing an ELSS fund

All ELSS funds were currently available only as active funds until December 2021 when the first passive ELSS fund was launched by IIFL.

A thumb rule to choose active funds can be

keep the expense ratio (TER) as low as possible
past returns are good to know (to avoid the consistently worst funds) but unimportant as a predictor of future returns
stick to 1-2 ELSS funds in the whole portfolio
you should ignore star ratings shown in rating portals

Warning and disclaimer: Choosing the best fund is an attempt to predict the future by looking at what things were in the past. You cannot predict the future is one of the axioms of personal finance. Therefore, investors should not spend too much time trying or believing in future predictions. This chart for example:

3-year rolling lump sum return of Nifty 50 index funds vs today's best and worst performing ELSS funds

The chart shows that today’s “best” performing ELSS fund has fluctuated around the returns of the index fund over a 3-year period using the previous 13 years’ worth of historical data. Today’s “worst” performing fund has also performed in the same way. This proves that there is no guarantee that either choice of today’s best or worst-performing ELSS will beat the Nifty 50 index fund over the next three years.

How to interpret the table

We have created a simple ranking scheme based on AuM, TER, SIP returns (3 and 5 years) and the last five calendar year absolute returns to generate a ranking of ELSS funds. It should be evident that funds without five years of history will appear at the bottom of the ranking table. We believe this to be fair since an active fund manager needs to prove their ability to beat their peers and the benchmark for a minimum amount of time.

This table shows the ELSS funds’ relative ranking based on the previous paragraph’s criteria.

Best tax-saving ELSS Mutual Funds in 2023?

If your current ELSS fund is in the top 3, you can consider keeping it. If not, consider reviewing if you are happy with the performance or not. If your current ELSS fund has a high TER (above 1%), re-consider continuing at such a high expense ratio. If you are invested currently in Regular funds, this is how you switch to Direct: How to switch from regular to direct funds?.

If you are considering investing in a new ELSS fund, look at the top 3-5 to understand the fund’s investment objective and the risks. Always consult with an investment advisor before making any investments.

Operationally speaking, if you have the cash available, perform a single lumpsum investment unless the amount is very large compared to your existing portfolio. In such a case, break it over a few months. The AMC will send an account statement by email that will suffice for investment proof submission.

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Asset Allocation (21) Basics (8) Behaviour (10) Budgeting (11) Calculator (16) Case Study (5) Children (12) Choosing Investments (35) FAQ (5) FIRE (13) Gold (6) Health Insurance (4) House Purchase (14) Insurance (14) International Investing (9) Life Stages (2) Loans (9) Market Movements (11) Mutual Funds (28) NPS (5) NRI (8) News (6) Pension (8) Portfolio Construction (42) Portfolio Review (24) Real Estate (4) Retirement (35) Review (12) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (10) Tax (25)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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