Best funds to save tax.

Summary: Here are eight winners that can help you reduce your tax outgo under Section 80C. Start SIPs in the ones that match your risk appetite.

In all probability, your checklist for the month's errands reads something like this: get the house painted before the festive season; refurbish the living room; finish the Diwali shopping. Now, add one more to this list: start tax planning. But it's just October. Why should you start your tax planning right now? It should be done at the beginning of the new year when your employer sends you the tax deduction notice, right?

Wrong. We have said this before and we are saying it again. Don't compress your tax planning in the last one or two months of the financial year. Spreading your investments over the year is crucial if you are investing in tax-saving mutual funds. Stock markets have been very volatile in the past two years. If you don't want to be caught on the wrong foot, take the SIP route instead of a lump-sum investment at the end of the year.

We have shortlisted eight of the best tax plans for you. Performance is not the only reason why these funds have been chosen. Each scheme has been handpicked on the basis of its risk profile, consistency of returns, investment style and quality of holdings. Using the same parameters, we have put these eight funds in four broad categories (see tables). This is not a ranking of the ELSS funds; all are good performers. Your choice should depend on your risk profile and expectations.

Large-cap solidity Slow and steady wins the race. Both Franklin Templeton Taxshield and SBI Magnum Taxgain have a decidedly large-cap orientation. While this means muted returns when the markets are rising, it also means a limited downside when the going gets tough. Franklin Taxshield fell less than the category in 2008, but has risen less than the average ELSS fund in 2009. In fact, both the funds have underperformed the category in the short term, but outperformed it over the longer term. Investors can expect returns in line with the broader market.

Incidentally, Magnum Taxgain is the largest ELSS fund, with assets worth Rs 4,434 crore almost 40% of the ELSS category. It tops the category for a five-year period with annualised returns of 35.56%. Don't expect an encore though. It is likely to give middle-of-the-road returns.

Fast-track growth For those who like to drive a bit faster, the Sundaram BNP Paribas Taxsaver and Fidelity Tax Advantage are good options. Though the former has underperformed the category in 2009, don't let this stop you. The fund has given scorching returns over the longer term 19% in the past three years and 33% in the past five years. It has 35% of its assets in mid-cap stocks, which can prove very rewarding. Fidelity Tax Advantage has matched the category average, but this can change to outperformance due to the 25% exposure to mid-caps and 11% to small-caps in its portfolio.

Mid-cap aggression No pain, no gain. If you can stomach a little risk, you have two winners in HDFC Taxsaver and Canara Robeco Equity Taxsaver. Both the funds have a sizeable exposure to mid-caps and small-caps. This aggression has paid rich rewards. While Canara Taxsaver has shot up 110% in the past six months, HDFC Taxsaver has risen 100%. It doesn't always pan out this way. HDFC Taxsaver was among the best performing ELSS funds between 2002 and 2005, but slipped subsequently. It has now regained lost ground. On the other hand, Canara Robeco Taxsaver has consistently beaten the category average and has been the best performer since 2006.

Turbo-charged on small-caps Small-cap stocks are like performance enhancing drugs. In the six funds discussed earlier, the maximum allocation to small-caps was 12%. However, Taurus Taxshield and Sahara Taxgain have invested almost 20% in this high-risk zone. This can be very rewarding when the going is good, but a dream run can easily become a nightmare.

Taurus Taxshield has given 76.12% returns in 2009, the highest in the category, but its performance has been erratic. The fund lost 10% in 2006 when the category rose by 30%. The next year, the fund shot up by 111%, while the ELSS average was 57%. Buy if you can handle the risk.

Reproduced From Money Today. Copyright 2009. LMIL. All rights reserved.

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