Which tax-saving mutual funds have given highest returns over three and five years?

Prudence calls for a more careful investment planning for not just better wealth creation but also for minimising tax outgo. For the lay person traditionally, the unit-linked insurance policies were the go-to instruments for saving income tax. These products were and still are marketed aggressively even though many reckon them to be the worst decision one can make to put their money either for insurance or for wealth generation.

But of course, things have changed materially over the last few years as mutual fund managers have aggressively pushed their products promising returns that can even beat the fast rise of the stock market. One set of mutual funds that make the most sense to the not so mature investor is the equity-linked saving instruments, or ELSS.

These mutual funds track the equity markets and offer incentives as they are counted as tax-saving instruments by income tax authorities. Unlike other mutual fund peers, however, they have a lock-in period of three years.

A calibrated approach to mutual fund investments calls for putting a small portion every month to smoothen the layer and the risk of investing in bulk at the top of the market. Nevertheless, it is a fact that many salary earners do tend to invest at the fag end of the financial year. So, if you are one of them, you may be looking at the ELSS options to choose from.

We filtered through the list of ELSS, or tax-saving mutual fund schemes, that have churned out the best returns for their investors. Now, one does tend to look at the near-term performance but that’s the last thing one should do for picking mutual funds. This is even more relevant for ELSS schemes as the money is anyway supposed to be locked for three years.

Our exercise looked at best returns generating ELSS schemes over a three- and five-year periods. To be sure, even though past performance is not the best factor that can be replicated in the future, it does give some indications of which ones are better than the rest.

We picked the best performers across both periods. Our research shows seven out of the top ten performers over a five-year period were also in the charts in the three-year period. These seven funds, out of three dozen peers, generated annual returns in excess of 17% each.

Quant Tax Plan is a consistent performer over the medium to long-term period. It generated the best returns across one-, three- and five-year periods.

Investors in the scheme, which had assets of around Rs 850 crore as of February end, pulled out over 33% in annual returns over a three-year period even after accounting for the market crash this month. One shouldn’t confuse this with Quantum Tax Saving, which has given single-digit returns over both three- and five-year periods!

Other top performers are BOI AXA Tax Advantage, Mirae Asset Tax Saver, Canara Robeco Equity Tax Saver and IDFC Tax Advantage, which all churned out 20% or more annually in the last three years.