Why MC30 has only 2 tax-saving funds in its basket?

Tax saving

MC30, a curated basket of 30 investment-worthy mutual funds, makes your investment journey easy and simpler. It presents just 30 schemes culled out from more than 1,000 schemes across asset classes. These schemes found their places in MC30 after rigorous risk-return tests. All you need to do is to pick a few from this crisp list, based on your risk appetite and goal horizon.

Though the Securities and Exchange Board of India (SEBI) has 39 categories for mutual funds, MC30 shortlists its candidates from just 11 categories. Equity Linked Saving Schemes (ELSS) is one of them, having its prominent place in the MC30 basket.

ELSS schemes are mutual fund schemes investing predominantly in equity assets. They come with a mandatory lock-in period of three years.

See here:  The complete MC30 basket of mutual fund schemes

Tax benefit under section 80C

An investment of up to Rs 1.5 lakh in ELSS schemes in a financial year is eligible for deduction under section 80C of the income tax act. ELSS has the lowest lock-in period among the investment products eligible for tax deduction under 80C.

Section 80C tax deduction benefits are only available to those who opt for the old income-tax regime. If you opt for the new income-tax regime, the tax break is not available.

Limit your investment in ELSS

Though there are 42 schemes within the ELSS category, MC30 recommends just two schemes. Why? The reasons are simple.

It is advisable to hold only one or a maximum two ELSS schemes which will be enough to meet your 80C tax target. Along with ELSS, it is easier to meet the required quantity of Rs 1.5 lakh in a financial year with other eligible instruments in the crowded 80C bucket.

It doesn’t make sense to add a new ELSS in your portfolio to meet the 80C requirement every year. Since your end purpose is the same, it is better to top-up the existing one every year with schemes that you have in your portfolio.

Also see: How to use MC30?

Potential long-term wealth creators

Ideally, ELSS schemes are the potential long-term wealth creators. Their equity-oriented portfolio helps to generate inflation-beating returns over the long run. The better way for salaried investors to invest in ELSS is to start a monthly systematic investment plan (SIP).  SIP allows you to invest in small amounts and avail tax benefits along with an opportunity to create wealth.

Also read: How many tax saving schemes do you need?

Here are our ELSS picks:

Kotak Tax Saver

Kotak Tax Saver (KTS) rounds up our ELSS picks. Harsha Upadhyaya has been managing the fund since 2013. As a fund manager at the helm for 10 years now, he ensures that the portfolio strategy remains consistent. That’s good news.

Upadhyaya selects businesses with better corporate governance, efficient capital allocation structure and those available at an attractive valuation. A three-year lock-in allows him to invest in fundamentally strong stocks but also those that see bouts of volatility, without facing redemption pressure.  He has invested around 55-60 percent of the scheme’s corpus in large-cap stocks and the rest in mid and small-cap shares.

The scheme has done well in rising as well as falling markets.

Canara Robeco Equity Tax Saver Fund

Unlike the peers in the ELSS category that have been enjoying the comfort of managing a less active portfolio (they follow buy and hold strategy) on account of the three-year lock-in, Canara Robeco Equity Tax Saver Fund (CRETS) churns its portfolio very actively.

It is evident from its churning ratio of 103 percent, which is far higher than the category’s 65 percent over the last three years. A higher churning ratio also helps the fund mitigate the high-conviction or concentration risk in a portfolio.

Shridatta Bhandwaldar and Vishal Mishra jointly manage this fund. They prioritise promoter integrity while picking stocks. The fund managers invest nearly 50 percent of the scheme’s corpus in companies that they call "compounders". These are quality businesses that have consistently done well in the past and are expected to do the same over the next two-three years.

But they keep 25 percent aside for what they call alpha generators– companies that are cyclical or firms that are expected to do well because of changes in the business environment. They invest the remaining 25 percent in emerging businesses.

Also Read: The methodology behind the curated basket of mutual fund schemes