Here’s why tax-saving mutual funds are the best way to save on taxes

You have plenty of tax-saving instruments under Section 80C of the Income Tax Act. But while saving on taxes, wouldn’t you want the best returns out of your investments as well? After all, the purpose behind investment is to build wealth. So, which of the tax-saving investments would help you do that?

Don’t just guess. Look at the data. That’s exactly what we did.

So, imagine it is three years ago and you were thinking of the same question. What option would have served you best? Would you be able to get your money back today if you needed it? Let’s find out! Look at the table to know what each investment option would be worth today, if you had invested Rs. 50,000 in March 2012.

A comparison of the performance and status of investment options under Section 80C that help save on taxes

*ELSS amounts assume the average returns of ELSS schemes for the period March 31, 2012 – Nov 17, 2015
**NPS amounts assume the maximum equity contribution of 50%, and the average returns of the fund managers for each category
ELSS has the shortest lock-in of three years. The other instruments have lock-in periods of five years or more.

As you can see, not only do tax-saving mutual funds (ELSS) have the shortest lock-in period, they also provide far superior returns than the rest. So, if you’re looking to add a strong wealth-building investment to your tax-saving portfolio, ELSS is the way to go.

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.

Bhavana Acharya

About the author:

Bhavana Acharya is a Mutual Fund Analyst at She holds a degree in management, with a specialisation in finance. Bhavana has been researching funds, markets, sectors and companies for the last seven years.
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  1. Your calculation on tax saving scheme is really good comparison.
    But NAV of ELSS varies also in a financial year. When these should be bought depending on their low NAV? How to know the best time?
    Does it vary as per Nifty or Sensex?

    1. An ELSS is an equity mutual fund. The NAV will therefore vary on a day-to-day basis depending on the scheme investments and the stock market. Nifty and Sensex are the barometer indices in the market which are used to indicate overall market movement. The benchmark (or the index against which an ELSS performance is measured against) will vary from scheme to scheme. It can be the BSE 100, or the Nifty 500, and so on.

      In a mutual fund, the amount you invest matters, and not the absolute NAV – a scheme with a high NAV is not better or worse than a scheme with a low NAV. There is no one good time to invest in an ELSS; the earlier you invest, the better it is since your money will have a longer time to compound and grow. You need to have a longer-term view. This holds true for every equity mutual fund investment, as well as investing in general. You can consider either an SIP in an ELSS (but note that each SIP instalment is locked in for 3 years) or then spread your total ELSS investment for the year in 3-4 tranches to make the most of market volatility.

  2. Don’t believe above post. I have invested in Elss Rs. 30,000 but now the worth is 27,000.

    So please don’t believe above post.

    1. Hi Thirumal,

      One, ELSS scheme returns will fluctuate because they invest in the stock market. There are no assured returns in ELSS unlike the other tax-saving investments. The stock market is definitely riskier than debt investments. But the higher returns ELSS delivers over other tax-saving options is precisely because of this extra risk. It also depends on the holding period – in the short term, the market can tank. 2015 is an example of this. Holding for the longer term will mitigate a good part of this risk.

      The other important point to note is on fund selection. There are both good and poorly performing ELSS schemes. The returns in the table above considers the average returns of all ELSS schemes – the badly performing ones are thus compensated by the ones that did outstandingly well. It is best to stick to those with long and proven consistent performance, such as the funds listed in our post here.

  3. Kindly let me know the best ELSS as on date as I am interested to deposit Rs 1 lakh in Jan 2016 to save tax in FY 2015-16(AY 2016-17) of Rs 20,000/-

    1. Hi, Damodara!

      You can choose from any of the funds listed here. They have been filtered based on their performance, consistency, risk, volatility etc., and have good long-term track records. The table shows the level of risk appetite needed for the funds listed above to help you make a decision. You can also use your FundsIndia account to schedule an appointment with our advisors for detailed portfolio advice.

      You can also make use of our tax-saving calculator to get an idea of where you can invest to save further tax under Section 80C of the Income Tax Act.

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