Equity Linked Tax Scheme Your Investment Tax Shield

There are hidden benefits of investing in tax saving mutual funds, it not only helps you to save tax, but it also helps you in building wealth in the long-term. DSIJ recommends five best equity-linked savings schemes.

‘Dear employees, it is time to finalise your personal finances and submit the investments proofs as declared’. This is a typical mail that many of us receive in the last month of the calendar year from our company's HR department. This is a wake-up call for many tax payers and triggers their search for the best tax saving options. The tax saving mutual funds have remained one of the best options. 

Nonetheless, a lot has changed in the mutual fund landscape since last time we did our story on best tax savings mutual fund schemes. These changes are being brought about by both regulator as well as the government. The major change impacting mutual fund investment has been announced by the government during the last budget. The budget introduced a tax of 10 per cent on long term capital gains (LTCG) of over Rs 1 lakh on equity mutual fund investments. This even applied to tax saving mutual funds, better known as Equity-Linked Saving Schemes (ELSS), which have a lock-in period of three years. ELSS earlier came under the E-E-E, that is, exempt-exempt-exempt, status. What this means is that the principal invested in these funds qualified for deduction under Section 80C of Income Tax Act, any periodic pay-out from these investments in the form of of dividends was also tax free under Section 10 and, more importantly, any gain made at the time of redemption of this instrument was even tax-free. 

However, the change introduced in the recent budget changed the status of the ELSS from E-E-E to E-T-T. That is, the initial investment is allowed for deduction, but any dividend paid by these funds is subject to dividend distribution tax of 10 per cent. This will be deducted by the fund houses before distributing to the investors and an investor need not pay tax on such pay outs. Some of the investors who had earlier opted for the dividend option as it allowed them a regular income (not necessary every month or year) will now have to be content with lower pay-out, as part of the gain will go into paying the tax. Finally, on redemption of the investments; if you make any gain, it will be also subject to tax as explained earlier. 

So, there has been a drastic change in the status of the ELSS from the current financial year. Despite such change in status, we see that ELSS remains one of the best tax saving instruments. The table below clearly shows some of the benefits offered by the ELSS over other products in the same category.

We are presenting you with the five best ELSS out of which you can chose two according to your need and risk profile. Please turn over for more details about the funds.

Jinesh Gopani
Head – Equity, Axis Mutual Fund

What will you attribute the relative consistent performance of your fund?
At Axis MF, we primarily follow bottom-up stock selection approach with a minimum 2-3-year view on stocks. Bias towards high quality and growth with strong fundamentals are the key look outs for our fund managers to select companies for their portfolios. Our approach with quality has enabled us to navigate through pockets of pain in the market. We pride ourselves on building portfolios that are index agnostic and build portfolios with a long term investment outlook. Market has rewarded Quality and growth style of investing post demonetization, which is reflected in our outperformance.

Our approach to quality involves an in-depth understanding of the businesses that we invest in. This process is twofold. Firstly, we evaluate the quantitative aspects like financials, past track record and other key metrics. Second and the most crucial is our interpretation of the qualitative aspects like management credentials and the potential of the business. 

There are four principles that the investment philosophy at Axis MF is driven by. These are:
Strong corporate governance/Strong promoter pedigree,
Secular growth rate of the sector, which is anywhere around 1.5 to 2x of GDP;
Strong business model, which demonstrates its pricing power in the product category and the business it is in, and ultimately.
Good ROE’s and cash flows

What is the investment strategy adopted by the fund?
The Fund endeavours to invest in a diversified portfolio of strong growth companies with sustainable business models. Though the benchmark is S&P BSE-200, the investments will not be limited to the companies constituting the benchmark. The Fund has the flexibility to invest across the market capitalization spectrum (i.e. Large, mid and small cap companies) and across industries / sectors.

The companies are individually researched and selected only when the fund management team has satisfied itself on robustness of the company’s business model, sustainability of its competitive advantage and the credibility of its top management team. The Scheme aims to remain fully invested at all times given the long term nature of the fund.

What is included in the portfolio and what is avoided especially after the liquidity crunch in NBFCs and an election going ahead?
Our focus on quality has been a driving force as mentioned earlier. Further due to our index agnostic nature of portfolio construction we have limited our focus to select names in the NBFC space where we believe the Asset Liability Management (ALM) systems are robust and risk mitigation processes are strong. Despite our overweight call on finance, our portfolios have remained largely unaffected by the recent liquidity crunch.

Elections have historically led to consumption jumps on account of populism and rural focus. Our investment theme over the last few quarters has remained consumption. This is likely to continue given the corporate fundamentals and relative growth witnessed in our portfolio universe. High frequency numbers and corporate results in Q2 have been positive across the board and hence give us confidence in an otherwise cautious marketplace.

Axis Long Term Equity Fund - Direct Plan 

This fund from the Axis AMC has always topped the charts in terms of performance since its inception in the year 2009, only to lose its steam in 2016 when it underperformed the benchmark. Nevertheless, in the following year (2017), the fund recovered from its low and finally, in the year 2018, it has again become the best in its category in terms of returns. 

The fund has been able to achieve this due to its robust investment strategy, which follows a bottom-up stock selection approach that focuses on high quality and growth companies along with strong fundamentals. While selecting stocks, the fund looks for superior and scalable businesses, a high return on capital and secular growth. The fund is also index agnostic, which means it is not dependent on only index to select stocks and picks stocks outside of its benchmark. Currently, the active weight of the fund, which constitute stocks that are not part of the index, is around 68 per cent. All this has helped the fund to outperform its category and benchmark in recent times too. The fund is overweight on financials, which has been a pain point for the equity market recently. However, the fund was able to steer through the situation without hurting itself too much. Year till date, it has given a return of 3.48 per cent, outperforming its category by 974 basis points. Even in the five-year period, the fund has delivered outstanding performance and has beaten the category performance by a good 450 basis points.

The large-cap oriented stocks dominate the fund, which has also helped the fund in its performance. At the end of November 2018, these stocks constitute around 73 per cent of net assets of the fund. The mid-cap stocks have weightage of 25.76 per cent in the fund’s total portfolio. Looking at the fund’s performance and portfolio, long-term investors can invest in this fund. 

* Note: All returns are calculated based on November 13, 2018 and returns over one year are annualised. Top holdings are as on November 30, 2018.



S Naren
ED & CIO, ICICI Prudential AMC

What will you attribute the relative consistent performance of your fund in recent years?
We believe the large cap bias of the portfolio has aided the performance of the fund. In general we have been conservative in our investment approach with pharma, healthcare, auto and power being the overweight sectors.

What is the investment strategy adopted by the fund?
We have a value investing approach to stock selection.

What sectors are included in the portfolio and what are avoided especially after the liquidity crunch in NBFCs and an election going ahead?
As of November 2018 end, the portfolio is underweight on banks, chemicals, consumer & non-durables, software and petroleum products. Pharmaceutical & healthcare services, auto, power and telecom services are the sectors we are overweight on.

Year 2018 has remained a volatile year for equity, how do you see in election year (2019) and returns expectation for 2019 in equity?
Historically, general election years have been volatile for the markets and 2019 too is likely to be no different. Therefore, we believe that investors should invest and accumulate throughout 2019 in a systematic way via SIPs and STPs, with a three year horizon. The categories of fund one can consider investing include ELSS for tax-saving purpose along with other categories such as balanced advantage and equity savings.

ICICI Prudential Long Term Equity

Here is a fund that has done amazingly well in the last ten-year period, where it has held the numero uno position in the ELSS category. The fund has been able to beat its category and benchmark return by 400 basis points. Since its inception more than 18 years back, it has pleased its investors with over 20.29 per cent annualised return, which means that if you had invested Rs 1 lakh in this fund in 2000, your investment will currently fetch you Rs 27.8 lakh.

Despite a good long term performance, this fund, like many other funds, went through a rough patch during 2006, 2007 and 2017. However, it has made a major turnaround in the last one year and has outpaced its category by a considerable 650 basis points. 

The main reason behind such a performance is its tactical allocation across sectors, stocks and market-caps. The fund manager been conservative in his approach and was overweight on healthcare, auto and power sector. Healthcare and auto each share a little more than 10 per cent of the total assets. Also, what aided the fund’s growth is its large-cap bias. At the end of November 2018, the fund had two-third of its assets invested in large-cap stocks. The fund follows value investing approach to stock selection and hence it is overweight on the pharmaceutical sector that has become attractive after almost three year of underperformance.

The fund is being managed by Sankaran Naren, ED & CIO, ICICI Prudential AMC and Harish Bihani, fund manager, ICICI Prudential AMC.Considering the fund's and fund managers' performance over the years and its asset allocation strategy, investors with moderate to high risk-taking ability can take exposure in this fund.

S N Lahiri
CIO, L&T MF 

What is the investment strategy adopted by the fund?
L&T Tax Advantage Fund is an ELSS fund with a flexible mandate to invest across the market spectrum, without any sector or capitalisation bias. The focus is on owning fundamentally strong and scalable businesses run by competent management with a good track record.

At L&T Mutual Fund we follow a proprietary investment process – G.E.M model. It involves Idea Generation, Evaluation, and Manufacturing & Monitoring of portfolio. Our strong research team rigorously examines an investment opportunity based on multiple parameters such as management track record, corporate governance, growth prospects, valuations, etc. before considering for inclusion in the portfolio.

The fund is well diversified with bottom-up stock selection using our proprietary G.E.M investment approach to determine the investment portfolio. Furthermore, the riskmanagement function plays a critical role in highlighting key portfolio risks and defines limits in terms of the maximum holding that they can have in a company.

What will you attribute to the relative consistent performance of your fund?
We look out for strong franchises with durable moats run by good management. We are index agnostic and tend to pick the best ideas, i.e., a combination of good earnings growth, reasonable valuations, improving prospects, etc.

We are bottom-up stock pickers, and every stock in the portfolio is considered on its merit. Given a lock-in period of three years, we take positions in stocks with longer-term return potential. The lock-in period also helps to pick some select mid and small cap stocks which generally have a longer incubation phase.

What sectors are included in the portfolio and what is avoided especially after the liquidity crunch in NBFCs and an election going ahead?
We are overweight on industrial products, cement and construction sectors whereas we have been underweight on IT, financial services and energy sectors, vis-a-vis benchmark.

The year 2018 has remained a volatile year for equity, how do you see in an election year (2019) and returns expectation for 2019 in equity?
Near-term pressures could be there both from global and domestic headwinds. Bottom-up stock picking with focus on earnings growth would continue to deliver superior returns. We expect higher volatility in the short term with the general elections around the corner. Meanwhile, earnings growth will be the key market driver.

L&T Tax Advantage Fund - Direct Plan 

Launched in February 2006, L&T Tax Advantage remains a fund for all seasons. The fund has been able to navigate well through bull as well as bear phases of the market with equal ease. During the bear phase of 2008 and 2011, the fund was able to contain its losses and fell less than its peers and benchmark. Nonetheless, during the bull phase of 2010 and 2017, it comfortably outpaced its benchmark and peers.

This performance is attributed to the fund manager, Soumendra Nath Lahiri, who is also the CIO of the fund house and invests in companies that are on top of his conviction list. The fund manager follows bottom-up stock selection strategy. Companies that have strong management or promoters and are efficient asset allocators reflected in higher return ratios are eligible to form part of the portfolio of this fund.

The fund has a well-diversified portfolio of around 65 stocks. What is also worth noting is that the fund does not have large exposure to any particular company and the top 10 stocks constitute only 36.40 per cent of the total assets. Even exposure to individual stocks is limited to six per cent and maximum weightage is given to HDFC Bank (5.14% of net assets) in its latest fact sheet. The strategy seems to have worked well with the fund and helped it to outperform the market. Currently, the fund manager is bullish on financial sector which constitutes 26.46 per cent of the total assets, followed by construction that constitutes 11.40 per cent of the portfolio.

Thus, looking at the fund’s portfolio and its performance over the years, and especially in the recent year, high-risk investors can take limited exposure to the fund. 

Franklin India Taxshield Fund - Direct Plan

Fund Manager Lakshmikanth Reddy & R Janakiraman

If you are one of those conservative investors who are looking out for a fund with proven stability and decent track record, then Franklin India Taxshield is the right fund for you. The fund is best suited for such investors as it has the lowest standard deviation of 13.14 per cent among its category and even its beta is lower than one, that is 0.86.

The lower volatility in the fund is a result of the predominant large-cap allocation that helped this fund to contain the losses in the corrective phase of the market in 2008 and 2011. However, such allocation has capped the fund’s performance in the bullish phase of 2009 and 2017, where the mid-cap and small-cap dedicated funds outperformed. Having said that, the buy and hold strategy stands good, coupled with lower portfolio volatility that gels well for the low-risk kind of investors. 

At the end of November 2018, large-cap stocks contributed almost 82 per cent of the fund's equity portfolio, while it held a highly diversified portfolio of 57 stocks with top ten stocks accounting for 46.06 per cent of net assets. The fund's top three sectors, namely, financials, energy and automobile, contributed almost 54 per cent of the net assets. Despite such a defensive market-cap and stock strategy, the fund has put up decent show in terms of the relative performance of its category peers in the long run. The fund has outpaced its category returns by 200 basis points in the ten-year period. The fund is managed by R Janakiraman since May 2016, which ensures stability and consistency in the fund's management and performance. Thus, investors with low risk appetite can take larger exposure to this fund.

Aditya Birla Sun Life Tax Relief 96 - Direct Plan Fund Manager : Ajay Garg

It is one of the oldest funds in the ELSS category. It has become part of our top 5 ELSS funds list mainly due to its performance over the years. Although, in the last one year, it stood 12th best fund among the ELSS category, in the last 10 years it ranked third among 22 schemes. It managed to beat the category returns by almost 300 basis points during the same period.

However, the fund has been doing very well in patches and had its ons and offs. In the last five years, the fund had been in the top league of the ELSS category in years 2014, 2015 and 2017; however 2016 and 2018 have been very ordinary as it underperformed its benchmark. However, almost 22-year long proven track record of performance, with an astonishing annualised return of 24.56 per cent since its inception, says it all about the fund.

The fund follows a bottom-up strategy while selecting stocks for the portfolio, with a special focus on quality companies. This is even reflected in the type of companies that the fund is holding. These stocks are very unconventional and are from the MNC pack. Such focus has recently helped the fund to perform better than its category. Going ahead, as volatility in the equity market is likely to continue, such portfolio is likely to outperform.

Moreover, despite it being a multi-cap fund, it has predominantly kept a mid-cap bias, which accounts for half of the assets. At the end of November 2018, the top three sectors where the fund manager is betting is financials, healthcare and services, accounting for almost half of the total assets, while the top ten stocks contributed around 55.44 per cent of the net assets. Hence, an investor with low to moderate risk appetite can take limited exposure to this fund.