Mutual Funds

Best tax saving mutual funds or ELSS to invest in 2022

Tax saving mutual funds or Equity Linked Savings Schemes (ELSS) help you to save income tax under Section 80C of the IT Act. You can invest a maximum of Rs 1.5 lakh in ELSSs and claim tax deductions on your investments every year. Are you interested? Before proceeding further, you better familiarise yourself with ELSSs.

Tax saving mutual funds or ELSSs invest in stocks. Therefore, they carry high risk. You should be aware of this aspect, especially if you are a first-time investor in equity mutual funds. Compared to your usual investments like Public Provident Fund, ELSSs do not offer guaranteed returns.

So, why should you invest in ELSSs? One, these schemes have the potential to offer higher returns. As you know, these schemes invest in stocks. And stocks typically offer higher returns over a long period of time. For example. The ELSS category offered an average return of around 16% over 10 years.

Two, ELSSs have the shortest lock-in period. Most other investment options under the 80C basket are government-backed investments. They typically come with longer lock-in periods. For example, PPF is a 15-year product that allows partial withdrawals after 6 years. The NSC is a 5-year product. So, if you want access to your money in three years, you should invest in ELSSs. But don’t count on it to offer you great returns in three years. You should always keep in mind that equity investing is for the long term.

And the third and the most important point to remember is that ELSSs are a great stepping stone for many investors. They often start with ELSSs and the mandatory lock-in period of three years in these schemes help them to weather the volatility in the stock market. Once these investors see the rewards in, say, five or seven years, they start investing more money in equity schemes.

If you are interested in investing in these schemes, here are our recommended ELSSs you may consider investing in the new year.

Best ELSS or tax saving mutual funds to invest in 2022.

Here is our methodology:

ETMutualFunds has employed the following parameters for shortlisting the equity mutual fund schemes.

Mean rolling returns: Rolled daily for the last three years.

Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.

ii) When H is less than 0.5, the series is said to be mean reverting.

iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.

X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

Outperformance: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

Average returns generated by the MF Scheme = [Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}

Asset size: For Equity funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)

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