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10 tax saving mutual funds for senior citizens to maximize returns

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Senior citizens often have specific financial goals when they consider investing in mutual funds. They look for options that not only protect their capital but also provide a steady income, easy access to funds (liquidity), and tax advantages.

Among the various tax-saving mutual fund schemes, the Equity Linked Savings Scheme (ELSS) stands out. ELSS mutual funds offer both growth potential and tax exemptions under Section 80C of the Income Tax Act.

What is an ELSS Fund?

ELSS (Equity Linked Savings Scheme) is a type of equity mutual fund in India. “These funds have a mandatory lock-in period of three years, during which at least 80% of the fund’s assets are invested in equities & the remaining is allocated to debt instruments. ELSS funds are famous due to their dual benefit of growth from equity investments and tax savings. Investors can claim deductions of up to Rs 1.5 lakh from their taxable income under Section 80C,” informs Girish Kumar, Research Team, Share India Securities Limited.

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Key Features of ELSS Funds

  • Equity Investment Focus: At least 80% of the fund is invested in equity or related instruments and the rest 20% in debt instruments.
  • Diversification: The funds are spread across various market sectors, themes, and capitalization sizes.
  • Lock-in Period: A minimum investment lock-in of 3 years is required, although there is no maximum holding period.
  • Tax Benefits: Tax exemptions are available under Section 80C, and returns are taxed as Long Term Capital Gains (LTCG).
  • Wealth Creation Potential: While offering tax efficiency, ELSS funds allow your investments to grow steadily over time.

The Best Part:

The lock-in period ensures your investment remains stable for at least three years, allowing it to grow without the impact of short-term market fluctuations. While ELSS is not a quick money-making option, it helps build wealth gradually over time, while also offering tax benefits under Section 80C.

Caution Note:

For senior citizens, the 3-year lock-in period of ELSS funds can be challenging if they need quick access to cash in emergencies. “While ELSS offers tax benefits and growth potential, the lock-in limits liquidity. Seniors should balance the tax advantages and returns against the need for easy access to funds. If liquidity is a concern, other options like debt funds or senior savings schemes may be more flexible,” advises Kumar.

However, if there are other liquid funds available for emergencies, ELSS can still be a good addition to the portfolio.

Criteria for Selecting ELSS Mutual Funds:

When suggesting good ELSS mutual funds, it is necessary to consider a few key criteria that align with both the investor’s financial goals and market conditions:

  • Historical Performance: Review the fund’s performance over 3, 5, and 10-year periods to see how it has performed in different market conditions. Consistency in delivering higher returns compared to the benchmark index (such as Nifty 500) is crucial.
  • Expense Ratio: The expense ratio directly impacts your returns. A lower expense ratio means less of your profit is taken by management fees, which is particularly important in long-term investments like ELSS.
  • Fund Manager’s Track Record: “The fund manager’s expertise and experience play a pivotal role in how the fund navigates market fluctuations. Check the manager’s past performance and experience in managing equity-based portfolios,” suggests Kumar.
  • Risk-Adjusted Returns: Look at ratios such as the Sharpe ratio or Sortino ratios to measure how well the fund compensates for the risks it takes. A higher ratio indicates better risk-adjusted performance.
  • Portfolio Composition: Examine the diversification of the fund across sectors and market caps (large, mid, and small caps). A well-diversified portfolio can balance risk and provide better returns over time.

Top ELSS Funds Based on These Criteria:

  1. Motilal Oswal ELSS Tax Saver Fund: 3-year return: 45.56% | Expense ratio: 0.65%
  2. SBI Long-term Equity Fund: 3-year return: 37.52% | Expense ratio: 0.93%
  3. HDFC ELSS Tax Saver Fund: 3-year return: 32.13% | Expense ratio: 1.08%
  4. DSP ELSS Tax Saver Fund: 3-year return: ~31.94% | Expense ratio: 0.68%
  5. Bank of India ELSS Tax Saver Fund: 3-year return: 31.43% | Expense ratio: 0.96%
  6. Quant ELSS Tax Saver Fund: 3-year return: 30.98% | Expense ratio: 0.65%
  7. Franklin India ELSS Tax Saver Fund: 3-year return: 30.79% | Expense ratio: 0.99%
  8. Baroda BNP Paribas ELSS Tax Saver Fund: 3-year return: 29.96% | Expense ratio: 0.95%
  9. Invesco India ELSS Tax Saver Fund: 3-year return: 29.96% | Expense ratio: 0.75%
  10. Nippon India ELSS Tax Saver Fund: 3-year return: 29.96% | Expense ratio: 1.01%

In conclusion, ELSS mutual funds offer a unique opportunity for investors to grow wealth while benefiting from tax savings under Section 80C. With a mandatory 3-year lock-in, they encourage long-term financial discipline and potential wealth accumulation. However, it’s essential to evaluate factors like fund performance, expense ratio, and risk before choosing the right ELSS for your portfolio.

(Disclaimer: The selection of the above-mentioned ELSS Funds is based on the recommendations by Share India Securities Ltd. Please consult your financial advisor before making any investment)