Equity Linked Saving Scheme (ELSS) mutual funds are also known as a tax saving mutual fund scheme as it is the only category among mutual funds that allows an investor to get up to Rs 1.50 lakh tax exemption under Section 80C of the Income Tax Act. 

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Not just a tax-saving scheme, ELSS funds have also given 29.67 per cent returns in the one year and 18.80 per cent returns in the three years (As per Value Research data as on January 19, 2024). 

Small caps, on the other hand, have been one of the top gainer mutual funds in the last few years, with 47.43 per cent returns in the one year and 32.04 per cent in the three-year priod.

Both ELSS and small-cap mutual funds have their strengths and weaknesses. 

ELSS mutual funds are considered stable as they have 80 per cent of their investments in accordance with Equity Linked Saving Scheme. 

They have a lock-in period of three years, which means you can withdraw investment from them only after three years. 

Milin Bakhai, Associate Partner, Direct Tax, N.A. Shah Associates said "In the journey towards wealth creation, a carefully created investment plan is very important. ELSS is one of such investment option which provide blend of wealth creation and tax optimisation. Generally, investment in equity funds is made considering long-term horizon for compounding benefit; and by virtue of lock-in period of 3 years, ELSS would be considered as ideal investment option. Salaried investor can choose monthly SIP of ELSS for periodic investment."

Small-cap mutual funds, on the other hand, invest 65 per cent of their money in small-cap companies. 

Such a large proportion in small-cap firms makes them highly vulnerable to market fluctuations. 

That's why they rise and fall quickly in sync with the share market. 

However, since the stock market has been growing fast for more than a year, small caps have given handsome returns. 

Best ELLS vs best small-cap mutual fund

As far as the best performing ELSS mutual funds in the last 3 years are concerned, Quant ELSS Tax Saver Fund has topped the ELSS category with an annualised return of 31.05 per cent in the three years (As of January 19, 2024). 

In the small-cap category, Quant Small Cap Fund stands in the No. 1 position with annualised returns of 46.61 per cent in the three years.     

Best ELLS vs best small-cap mutual fund tax calculations and returns

When we calculate the returns of the best performing ELSS and the small-cap mutual funds, we consider a period of three years because ELSS has a lock-in period of three years. 

We are taking the lump sum investment for a period of three years in each fund to get a clear picture or tax calculation after exemption on capital gains tax and the benefits up to Rs 1.50 lakh under Section 80C.

Gains and Tax Calculations

  Quant ELSS Tax Saver Fund (Rs) Quant Small Cap Fund (Rs) 
Purchase 1000000.00 1000000.00
CMP 2250916.13 3151191.61
LTCG 1250916.13 2151191.61
Exemption 100000.00 100000.00
Taxable LTCG 1150916.13 2051191.61
10% LTCG Tax 115091.61 205119.16

Chart Courtesy: Bankbazaar.com

 

Tax calculation and returns of best ELSS

Since Quant ELSS Tax Saver Fund has given annualised returns of 31.05 per cent. 

If one had invested Rs 10 lakh in a lump sum in the fund, they would have got total returns of Rs 2250916.13 after three years. 

The capital gains would have been Rs 1250916.13. 

Since one doesn't have to pay tax on the first Rs 1 lakh earned in mutual funds, the taxable income in that case would have been Rs 1150916. 

The long-term capital gains tax, which is 10 per cent (which you pay if you withdraw money afer one year) would have been Rs 115091.60. 

It means, on a Rs 10 lakh investment in the best ELSS fund, the net income after three years would have been Rs 1135824.52.

This income excludes tax exemption of Rs 1.50 lakh under Section 80C. If one has no other investment under Section 80C other than the ELSS, their total income would have been Rs 1285824.52. 

Tax calculation and returns of best small-cap mutual fund

At a rate of 46.61 per cent annualised returns, a lump sum investment of Rs 10 lakh in Quant Small Cap Fund would have given a total return of Rs 3151191.61 in three years. 

The long-term capital gains would have been Rs 2151191.61. 

After a tax exemption of Rs 1 lakh, the taxable income would have been Rs 2051191.61. 

At 10 per cent long-term capital gains tax, the tax would have been Rs 205119.16. 

It means income after tax would have been Rs 1846072.45. 

It means the best small-cap mutual fund would have given you Rs 560247.93 more than the best ELSS mutual fund at an investment of Rs 10 lakh in the three years.