As we approach the last quarter of this financial year, we are sure you may have received calls from your CA or HR enquiring about your tax-saving investments, and rightly so. It doesn’t matter whether you are Elon Musk or an average joe; we are all trying to save taxes in the most legal way possible. And arguably, the best way to save taxes is to invest in the best ELSS or Tax Saving Mutual Funds for 2022.
The full form of ELSS is Equity Linked Savings Scheme. Over the last decade, ELSS or Tax Saving Mutual Funds have outperformed all other traditional tax-saving instruments like 5-year bank fixed deposits, Public Provident Funds (PPF), National Saving Certificates (NSC), etc. Currently, there are 44 ELSS or Tax Saving Mutual Funds in India, and all of them will help you save tax. That said, not all of them may help you create wealth.
The unique selling point (USP) of ELSS funds is that they also help you create wealth and achieve your financial goals in addition to saving Tax. This article will reveal the three best ELSS funds for 2022 out of the 44 ELSS funds available in the Indian markets. These three best ELSS funds for 2022 will help you Save Tax and create superior long-term wealth… a double bonanza!
Now before we reveal the list of the three best ELSS or Tax Saving Mutual Funds for 2022, let us first understand what are ELSS or Tax Saving Mutual Funds, advantages of ELSS funds, the performance of ELSS or Tax Saving Mutual Funds, and the taxation of ELSS or Tax Saving Mutual Funds. Click here if you want to directly hop on to the list of the best ELSS funds for 2022.
What are ELSS Mutual Funds?
SEBI defines ELSS mutual funds as “equity-oriented mutual fund that must invest a minimum 80% of its total assets in equity and equity-related instruments in accordance with the equity-linked savings scheme, 2005 as notified by the Ministry of Finance”.
As per the Ministry of Finance, ELSS or Tax Saving Funds can invest in equities, preference shares, fully convertible debentures, and even bonds of companies. The regulation also states that after three years, ELSS funds can also invest up to 20% of their net assets in short-term money market instruments like treasury bills, certificates of deposits, etc.
ELSS or Tax Saving Mutual Funds help you save tax under Section 80C of the Income Tax Act, 1961. When you invest in ELSS or Tax Saving Mutual Funds, you can claim tax deduction up to Rs 1.5 Lakhs in a financial year.
So, what are ELSS mutual funds?
ELSS funds are equity mutual funds that invest a minimum of 80% of the corpus in equity shares of companies listed on the stock exchange. The only catch is that ELSS or Tax Saving Mutual Funds have a lock-in period of three years, unlike other equity mutual funds that can be redeemed anytime. In the case of ELSS funds, you cannot redeem your investment before three years, under any circumstances.
An important thing to note in this SEBI definition of ELSS funds is that SEBI merely states that 80% of the corpus must be invested in equity shares. It does not specify equity shares from which market capitalisation. So, the fund manager has the freedom to select stocks from either large, mid, or small-cap market capitalisation. Plus, the portfolio could be sector agnostic.
The pie chart below shows the portfolio of Axis Long Term Equity Fund, one of the best ELSS funds for 2022. As you can see, the fund is a large-cap-oriented ELSS fund with 79.48% allocation to large-cap stocks, 18.68% to midcap stocks, and 1.83% to small-cap stocks.
Graph 1: Composition of Axis Long Term Equity Fund
Data as of 30th November 2021
(Source: ACE MF, PersonalFN Research)
While most ELSS or Tax Saving Mutual Fund managers stick to large-cap stocks, this is not a rule as such. Some fund managers can be bullish towards small-cap stocks as well. Take the example of UTI Long Term Equity Fund, one of the oldest ELSS funds in India (launched on 15th December 1999). The fund invests a big chunk, nearly 30.66%, in midcap stocks and is relatively riskier than a large-cap-oriented ELSS mutual fund.
Graph 2: Composition of UTI Long Term Equity Fund
Data as of 30th November 2021
(Source: ACE MF, PersonalFN Research)
Hence, before you commit to investing in ELSS or Tax Saving Mutual Funds, you need to keep in mind the following:
- Even the best ELSS or Tax Saving Funds are not risk-free. Your corpus will be invested in equity shares prone to market ups and downs.
- ELSS funds invest across market capitalisation. So, don’t think that all ELSS funds play it safe and invest in only large-cap stocks. A lot of them invest in mid and small-cap stocks to amp up the returns and end up becoming too risky.
- ELSS funds have a compulsory lock-in period of three years. You cannot redeem from the fund for education, marriage, or even an illness due to the statutory lock-in period. Hence, the selection of best ELSS or Tax Saving Mutual Funds is the key.
- You can claim a deduction of up to Rs 1.5 lakh (from your Gross Total Income) per financial year under Section 80C of the Income Tax Act, 1961. This deduction is available for the financial year you invest in the ELSS or Tax Saving Mutual Fund.
Now before we reveal the list of the three best ELSS or Tax Saving Mutual Funds for 2022, it is our duty first to point out why we believe ELSS funds are superior to other tax-saving instruments, specifically PPF.
PPF is one of the most popular and preferred tax-saving instruments for Indian retail investors. They are in awe of the guaranteed and super safe returns provided by PPF. But is PPF the best tax-saving option for you? Can PPF beat ELSS funds for wealth creation and saving Tax? Let’s find out …
ELSS Funds vs. PPF – Which is the Best Tax Saving Instrument in 2022?
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From the safety of capital perspective, PPF is superior to ELSS, as in PPF your money is not subject to market-linked risk. You earn a fixed rate of interest, which the government reviews quarterly.
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The returns generated by PPF are consistently falling while the returns generated by ELSS or Tax Saving Funds have been far more appealing. The graph below shows how the interest rate on PPF has gradually declined over the years.
Graph 3: Decline in Interest Rate on PPF
Data as of 30th November 2021
(Source: EPFO) -
Now compare this (the PPF interest rate) with the performance of ELSS or Tax Saving Mutual Funds across various time frames; the returns clocked by ELSS are far more enticing.
Graph 4: Performance of ELSS or Tax Saving Mutual Funds
Returns as on 20th December 2021
(Source: ACE MF, PersonalFN Research)In the last three years, the ELSS or Tax Saving Mutual Fund category has generated, on average, a return of 15.98% as of 20th December 2021. In contrast, PPF returns have fallen from 7.60% in 2018 to 7.10% in 2021. So, there is no doubt that ELSS funds have more than compensated investors for the added risk as opposed to PPF.
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The next reason why ELSS or Tax Saving Mutual Funds are superior to PPF is the lock-in period. When you invest in PPF, your money is locked in for 15 years. This lock-in period is much higher than the three-year lock-in period of ELSS mutual funds. Though you can redeem from PPF, the withdrawal amount is capped at 50% of the balance at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is higher.
But do note that you cannot withdraw prematurely from PPF for any random reason. You can withdraw only for specified situations like treatment of life-threatening disease of an account holder, spouse, children, or dependent parents. This is not the case with ELSS mutual funds, where you can withdraw any time and for any reason after completing the statutory three-year lock-in period.
These three rationales are enough to prove our point that ELSS or Tax Saving Mutual Funds are indeed the best tax saving option in 2022 or any other year for that matter. If this is not enough, let us quickly take a look at the advantages of ELSS mutual funds.
Biggest Advantages of ELSS or Tax Saving Mutual Funds
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Lower Taxes: The most significant benefit of ELSS or Tax Saving Funds is that it helps you save tax as you can claim a tax deduction of up to Rs 1.50 lakh under section 80C of the Income Tax act, 1961 in the year which you invest.
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Superior Long-Term Wealth Creation: While tax benefit is a considerable advantage, it is not the only advantage of ELSS or Tax Saving Funds. ELSS or Tax Saving Funds also help you create long-term wealth. As we saw earlier in graph 4, ELSS or Tax Saving Mutual Funds have generated a return of 16.84% in the last 10 years, as of 20th December 2021.
The graph below shows the corpus created by starting a SIP of Rs 10,000 per month in Axis Long Term Equity Fund – Direct-Growth against PPF between 20th December 2011 to 20th December 2021.
Graph 5: SIP Effect – Axis Long Term Equity Fund Vs PPF
The above graph is for illustrative purposes only
Data as of 20th December 2021
(Source: AMFI)The difference between the corpus created in ELSS or Tax Saving Funds versus PPF is remarkable — a whopping Rs 10.22 lakh or 65.11% difference on an absolute basis.
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No Withdrawal Hassles: When you invest in ELSS or Tax Saving Mutual Funds, you are bound by a statutory lock-in period of three years. But post this, you do not have any restrictions on redemptions. You can withdraw your funds at your will by logging in to your online mutual fund account or submitting a physical redemption form. This is a lot more convenient than redeeming from PPF, where you cannot redeem before the fifth year, there is a cap on redemption amount, and you need a solid reason for redemption. Hence, ELSS or Tax Saving Funds' second most significant advantage is that there are no withdrawal hassles.
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Shortest Lock-in Period: A big advantage of ELSS or Tax Saving Mutual Funds is that they have the shortest lock-in period of three years compared to the five years in Tax Saving Bank FDs and 15 years in PPF. Hence, ELSS or Tax Saving Funds are the most liquid tax-saving investment avenue in India.
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Expert Portfolio Management: When you invest in ELSS or Tax Saving Funds, your corpus is managed by expert fund managers, who invest the corpus in stocks across market capitalisation and sectors. This allows your investment to grow with various opportunities in the entire stock market.
Taxation of ELSS or Tax Saving Funds
ELSS funds are equity mutual funds. Hence, they follow equity taxation but with a slight change. Generally, equity mutual funds have a holding period of 12 months. But in the case of ELSS funds, the holding period is 36 months or three years.
- Since you cannot sell your ELSS or Tax Saving Fund before the compulsory lock-in period of three years, the short-term capital gains are redundant.
- You pay a long-term capital gains tax of 10% on gains above Rs 1 Lakh in a financial year when you sell your ELSS or Tax Saving Fund after three years.
An important thing to note here is that if you are doing a SIP in ELSS or Tax Saving Funds, then each instalment must complete three years for you to redeem the fund and for long-term capital gains to be applicable.
Many investors are under the impression that if they start SIP in the ELSS or Tax Saving Fund on 1st January 2021, they can redeem all their units on 1st January 2024, i.e., after three years. But this is a big misconception as each SIP instalment must complete three years before you can redeem from the ELSS or Tax Saving Fund.
Let us now take a look at the three best ELSS or Tax Saving Funds for 2022.
Best ELSS or Tax Saving Funds for 2022
#1: Mirae Asset Tax Saver Fund
The first best ELSS or Tax Saving Fund for 2022 is Mirae Asset Tax Saver Fund, which has generated a one-year return of 33.16% against a category average of 27.37% (as of 20th December 2021). The fund is a crowd favourite as it has an AUM of Rs 10,087 crores (as of November 2021), which is the second-highest in the ELSS funds category.
- A lump sum investment of Rs 1 Lakh in the fund would have grown to Rs 1.86 Lakhs in the last three years.
- A monthly SIP of Rs 10,000 in the fund would have grown to Rs 5.54 lakhs in the last three years.
Mirae Asset Tax Saver Fund was launched on 28th December 2015 and has generated a return of 21.82% since its launch. The fund currently has a total of 61 stocks in its portfolio, which comprises 73.73% in large-cap stocks, 17.48% in mid-cap stocks, and 8.79% in small-cap stocks. Mirae Asset Tax Saver Fund has allocated its asset to top-5 sectors as under –
Table 1: Top-5 Sector Allocation of Mirae Asset Tax Saver Fund
| Sector | % Allocation |
| Financial | 31.17% |
| Technology | 14.17% |
| Automobile | 8.69% |
| Energy | 7.92% |
| Healthcare | 6.11% |
Data as of 30th November 2021
(Source: ACE MF, PersonalFN Research)
Let us look at the performance of Mirae Asset Tax Saver Fund against its benchmark, Nifty 500 TRI, as of 20th December 2021.
Graph 6: Performance of Mirae Asset Tax Saver Fund
Returns as on 20th December 2021
(Source: ACE MF, PersonalFN Research)
One of the key reasons why Mirae Asset Tax Saver Fund is the best ELSS fund for 2022 is the fact that it has consistently beaten its benchmark across one, three, and five-year periods. The fund has generated an alpha of 4.87% over its benchmark Nifty 500 TRI as of 20th December 2021.
Table 2: Key Facts of Mirae Asset Tax Saver Fund
| Launch Date | 28th December 2015 |
| Return since launch | 21.82% |
| AUM (as of 30th November 2021) | Rs 10,087 Crore |
| Expense Ratio | 0.43% |
| Turnover | 74.00% |
| Alpha | 4.87% |
| Sharpe Ratio | 0.94% |
| Sortino Ratio | 1.04% |
| 1-year return | 33.16% |
| 3-year return | 22.97% |
| 5-year return | 22.92% |
Data as of 20th December 2021
(Source: ACE MF, PersonalFN Research)
Best ELSS Funds for 2022 #2: Canara Robeco Equity Tax Saver Fund
Canara Robeco Equity Tax Saver Fund is our next pick as the second-best ELSS or Tax Saving Fund for 2022. The fund has generated a one-year return of 33.07% against its benchmark, S&P BSE 500 TRI’s return of 17.16%. This fund is a hidden ELSS gem as despite being launched on 31st March 1993, the fund has an AUM of Rs 2,876 crores only. Canara Robeco Equity Tax Saver Fund has generated a return of 15.33% since its launch (as of 20th December 2021).
- The value of Rs 1 Lakh invested as a lump sum in the fund is worth Rs 1.86 Lakh in the last three years.
- The value of a monthly SIP of Rs 10,000 has grown to Rs 5.53 Lakhs in the last three years.
The fund has currently invested in 58 stocks, comprising 77.42% large-cap stocks, 20.36% midcap stocks, and 2.22% small-cap stocks. Canara Robeco Equity Tax Saver Fund has allocated its asset across top-5 sectors as under –
Table 3: Top-5 Sector Allocation of Canara Robeco Equity Tax Saver Fund
| Sector | % Allocation |
| Financial | 30.58% |
| Technology | 13.47% |
| Construction | 8.64% |
| Automobile | 8.50% |
| Services | 6.06% |
Data as of 30th November 2021
(Source: ACE MF, PersonalFN Research)
Let us look at the performance of the Canara Robeco Equity Tax Saver Fund against the benchmark S&P BSE 500 TRI as of 20th December 2021.
Graph 6: Performance of Canara Robeco Equity Tax Saver Fund
Returns as on 20th December 2021
(Source: ACE MF, PersonalFN Research)
As seen by the graph above, Canara Robeco Equity Tax Saver Fund has outperformed the S&P BSE 500 TRI across time frames.
Table 4: Key Fact of Canara Robeco Equity Tax Saver Fund
| Launch Date | 31st March 1993 |
| Return since launch | 15.33% |
| AUM (as of 30th November 2021) | Rs 2876 Crore |
| Expense Ratio | 0.76% |
| Turnover | 67% |
| Alpha | 6.36% |
| Sharpe Ratio | 1.02% |
| Sortino Ratio | 1.09% |
| 1-year return | 33.07% |
| 3-year return | 23.02% |
| 5-year return | 21.08% |
Data as of 20th December 2021
(Source: ACE MF, PersonalFN Research)
Best ELSS Funds for 2022 #3: Axis Long Term Equity Fund
The other best ELSS or Tax Saving Fund for 2022 is the Axis Long Term Equity Fund. The fund has generated a decent return of 21.77% in the last year as of 20th December 2021. The fund has a massive AUM of Rs 33,529 crores (as of 30th November 2021), which is the highest in the ELSS or the Tax Saving Mutual Fund category. The fund was launched on 29th December 2009 and has generated a return of 17.72% since inception as of 20th December 2021.
- The value of Rs 1 Lakh invested as a lump sum in the fund is worth Rs 1.67 Lakh in the last three years.
- The value of a monthly SIP of Rs 10,000 has grown to Rs 5.10 Lakhs in the last three years.
The Axis Long Term Equity Fund owns a compact portfolio of 34 stocks which consists of 79.48% in large-cap stocks, 18.68% in midcap stocks, and 1.83% in small-cap stocks. The fund has allocated its asset to top-5 sectors as under –
Table 5: Top-5 Sector Allocation of Axis Long Term Equity Fund
| Sector | % Allocation |
| Financial | 31.36% |
| Services | 18.21% |
| Technology | 12.05% |
| Chemicals | 9.06% |
| Healthcare | 8.03% |
Data as of 30th November 2021
(Source: ACE MF, PersonalFN Research)
Let us look at the performance of Axis Long Term Equity Fund against its benchmark, Nifty 500 TRI, as of 20th December 2021.
Graph 7: Performance of Axis Long Term Equity Fund
Returns as on 20th December 2021
(Source: ACE MF, PersonalFN Research)
As seen by the graph above, the Axis Long Term Equity Fund has outperformed the Nifty 500 TRI across time frames.
Table 6: Key Facts of Axis Long Term Equity Fund
| Launch Date | 29th December 2009 |
| Return since launch | 17.72% |
| AUM (as of 30th November 2021) | Rs 33,529 Crores |
| Expense Ratio | 0.74% |
| Turnover | 39% |
| Alpha | 3.60% |
| Sharpe Ratio | 0.86% |
| Sortino Ratio | 0.95% |
| 1-year return | 21.77% |
| 3-year return | 18.62% |
| 5-year return | 19.66% |
Data as of 20th December 2021
(Source: ACE MF, PersonalFN Research)
This completes our list of best ELSS or Tax Saving Funds for 2022. We have purposely not covered the ‘who should invest in ELSS funds’ question because we believe that every person who can afford to take some calculated risk to build wealth and wants to save tax, must invest in ELSS or Tax Saving Funds. It trumps all other traditional tax-saving instruments in all aspects. But we would like you to comment on whether you would invest in the best ELSS or Tax Saving Funds or not.
FAQs on ELSS or Tax Saving Funds
1. What is the full form of ELSS?
The full form of ELSS is Equity Linked Savings Scheme.
2. What are ELSS Funds?
ELSS funds are tax-saving mutual funds that have a mandate to invest a minimum of 80% of the corpus in equity stocks of companies listed on the stock exchange.
3. What is the lock-in period of ELSS funds?
ELSS funds have a lock-in period of three years.
4. What is the maximum amount you can invest in ELSS funds?
There is no cap on the maximum amount you can invest in ELSS funds. But you can claim up to Rs 1.5 lakh as a deduction (from the Gross Total Income) under Section 80C of the Income Tax Act, 1961 in the year you invest.
5. Which are the best ELSS funds for 2022?
The three best ELSS funds for 2022 are:
- Mirae Asset Tax Saver Fund
- Canara Robeco Equity Tax Saver Fund
- Axis Long Term Equity Fund
This article first appeared on PersonalFN here
