Are you thinking of incorporating tax-saving funds in your mutual fund portfolio to save more of your hard-earned money? Tax saving funds, also known as ELSS mutual funds or Equity Linked Saving Schemes, are a great investment choice for investors who want to build wealth and earn regular returns while saving tax at the same time.
Funds falling in the tax saving category are an outstanding investment avenue you should choose to produce profits in the long term. Continue reading the blog further to gain valuable financial insights about tax–saving mutual funds and their various aspects.
What are tax saving funds?
Tax saving funds fall under the diversified category of mutual funds. These funds have a maximum (about 65%) exposure towards equity and equity-oriented assets, while some parts of these assets are also invested in debt securities.
Only these mutual funds are eligible for tax deductions under the provisions of section 80C of the Income Tax Act, 1961. Under this tax saving scheme, you can claim tax deductions of up to Rs 1,50,000 and save up to Rs 46,800 in a single tax year. Furthermore, these funds come with a 3-year mandatory lock-in period, which is the shortest among all other 80C options.
What are the features of tax saving funds?
Listed below are some of the very important features of tax saving funds that make them a sought-after option among investors. Read further to understand them clearly:
- Funds under this scheme allocate their investments by buying equities in different sectors, market caps, and themes. They are doing so to achieve diversification, thereby lowering risk.
- Furthermore, these funds have a lock-in period of shorter duration and generate higher returns when compared to other 80C investments.
- The next feature of ELSS mutual funds is that they allocate at least 80% of their capital into equity and equity-linked securities, and the remaining into debt and hybrid instruments.
- The profits generated under this scheme are treated as long-term capital gains and thus taxed at 12.5%.
- The next feature in our list is that these funds do not have any maximum tenure for investments.
- The most important feature is that these funds provide tax relief under section 80C of the Income Tax Act.
List of top tax saving funds in India 2025
Here is the list of some of the best tax-saving funds in India 2025, along with their details:
1. DSP ELSS Tax Saver Fund
Here is what describes the DSP ELSS Tax Saver Fund:
- This fund has a total Asset Under Management (AUM) of 14,981.09 cr as of 28th February 2025.
- The total age of the fund is 12 years and 2 months.
- This fund can help you beat the impact of rising prices over the long term as it delivered a return of about 25% CAGR in the last 5 years.
- As of the date 28th February 2025, this fund has a current allocation of 95.31% in equity and the remaining in debt or cash.
- Choose this fund if you have the patience & mental resilience to remain invested for a decade or more.
2. SBI Long-Term Equity Fund
Here is what describes the SBI Long Term Equity Fund in five main points:
- This fund has delivered an annual CAGR of about 23% in the last 5 years.
- This fund has been managing an impressive 25734.58 Cr of numerous investors.
- The minimum amount you can invest through both the lump sum and SIP modes is Rs 500.
- Mr. Dinesh Balachandran has been managing this fund since September 2016.
- The expense ratio of the fund is 1.6% for the Regular plan as of Mar 04, 2025.
3. HDFC ELSS Tax Saver
Here is what describes the HDFC ELSS Tax Saver Fund in five crucial points:
- This fund has impressively delivered a CAGR of 26.85% in the last 5 years.
- Talking about its AUM, it is managing an astounding AUM of around 15413.45 Cr.
- The inception date of this fund is 31st March 1996.
- Roshi Jain has been managing this fund.
- The expense ratio of the fund is 1.67% for the Regular plan as of Feb 28, 2025.
4. Motilal Oswal Long-Term Equity Fund
Here is what describes Motilal Oswal Long Term Equity Fund in five crucial points:
- This fund under the regular plan currently holds Assets under Management worth Rs 3405.01 crore as of January 31, 2025.
- In the last 5 years, this fund has generated a very good CAGR of 18.75%.
- The expense ratio of the fund is 1.87% for the Regular plan as of Mar 03, 2025.
- One of the best funds for investors who want to save tax and get the benefit of 80C with a lock-in period of 3 years.
- The minimum investment amount required is Rs 500 for both the SIP and lump sum investments.
5. Parag Parikh ELSS Tax Saver Fund
Here is what describes the Parag Parikh ELSS Tax Saver Fund in five crucial points:
- It is an open-ended equity-linked tax saving fund with a statutory lock-in of 3 years and tax benefit
- The scheme was launched in July 2019.
- This fund currently holds Assets under Management worth Rs 4572.13 crore as of Jan 31, 2025.
- It has generated a CAGR of 22.69% in the last 5 years.
- This fund has an asset allocation of 81.12% in equities and 19.98% in debt.
Who should invest in tax saving funds?
Normally, early investors don’t prefer incorporating tax saving funds in their mutual fund portfolio either because they are not aware or they prefer other luring short-term funds. However, if you choose mutual funds, then you need to stay consistent and disciplined with your investments in the long run to create wealth.
In my opinion, any investor or HUF who wants to save up to Rs 46,800 in a single year on taxes should prefer to invest in ELSS funds. But, make sure these funds come with associated risks as they invest more than 80% of their capital in equities and have at least 3 years of compulsory locking period. Therefore, choosing to stay invested for a longer duration (at least 5 years) is beneficial.
Young and early investors, as they are in the initial stages of their professions, should incorporate this scheme into their portfolio to unleash the power of compounding while saving taxes at the same time.
How to evaluate the best tax saving funds?
Listed below are a few criteria that you can use to assess the best ELSS mutual funds for your portfolio. Dive in now to understand them in detail:
1. Fund Returns
You need to compare the fund’s performance with the underlying index to make sure that the fund has been consistent over the past few years. It is one of the most essential parameters to fetch the best performance fund from several available options.
However, you also need to keep in mind that the previous performance does not purely guarantee future returns. But it depends on the market movements and the fund manager’s performance.
2. Fund History
Now imagine this, a fund house that has consistently performed in the last 5 to 10 years and has also generated additional alpha. Sounds like a fund you want to include in your portfolio.
3. Financial Ratios
Now comes a little complex aspect of mutual fund investing that is – considering various financial parameters like Standard deviation, Sortino ratio, Sharpe ratio, Alpha, and Beta to evaluate fund performance.
Concepts like a fund with a higher standard deviation and beta are riskier than a fund having a lower standard deviation and beta seem difficult to comprehend. Furthermore, choose funds having a higher Sharpe ratio as they offer higher returns for the additional risk you take.
4. Expense Ratio
The expense ratio portrays the portion (in percentage) of your investments that goes towards managing your tax saving funds. A fund with a lower expense ratio allows you to take higher returns directly to your account. However, if you are a busy individual and don’t have much experience in fund selection, you can also connect with a reliable Mutual Fund Distributor (MFD) like Wealth Redefine. This way, you get the expert wealth consultant’s advice, which helps you to make better returns compared to when you manage everything.
These distributors do not charge anything from you, but they make you invest in regular funds, which charge a little (around 0.7%) more in the form of an expense ratio. However, here is a certainty: you will make enhanced returns in the long run.
Risk associated with tax saving funds
As you already know the major portion of the ELSS funds is invested in buying equities or shares, therefore they also carry the same degree of risk as any equity funds. But, remember that these risks can be further reduced if you choose to invest for a longer duration, let’s say for over 10 years. Additionally, the lock-in period of three years ensures that the risk gets significantly reduced.
Conclusion
In conclusion, tax saving funds are appropriate for investors having a high-risk appetite as they invest a major portion of their capital in equities and equity-related instruments. Overall, it is a great investment choice for investors who fall under the higher tax brackets.
Moreover, ELSS funds have the shortest lock-in period among all section 80C investments. More importantly, investing in ELSS will not only help you create wealth but also save taxes at the same time.
