Cover Story : HAVE YOU PARKED IN THE ELSS ZONE?

The year 2014 has been one of the best years for the equity market. Although frontline indices like BSE Sensex and CNX Nifty appreciated by around 30 per cent, the broader market saw more gain - for example, BSE’s small-cap and mid cap indices gained by 69 per cent and 54 per cent respectively during the year. Similarly, sectoral indices such as auto and bankex witnessed appreciation of more than 50 per cent. We believe that we are at the start of a multi-year Bull Run, and equity as an asset class will remain one of the best investment destinations for you. Against this backdrop and the tax-saving season being quite upon us, equity-linked saving schemes (ELSS) from mutual funds remain the preferred route. They serve the dual purpose of reducing your tax liability as well as letting your money grow. These tax-planning mutual fund schemes invest in stocks and qualify for tax deduction under Section 80C of the Income Tax Act 1961.

There are many other instruments competing within the same section for your investments that will give you the same kind of deduction benefit but not necessarily the same returns. The most common instruments under Section 80C include the National Savings Certificate (NSC), Public Provident Fund (PPF), five-year bank fixed deposits, tuition fees, housing loan (principal) repayment, life insurance premiums, etc. All these investments have their own pros and cons and hence before committing your fund you need to weigh your options cautiously.

Regardless, we believe that ELSS funds are one of the best avenues to save tax under Section 80C. This is because these not only provide the benefit of tax deduction but also the potential upside of investing in the equity markets. The icing on the cake is that no tax is levied on the long-term capital gains from these funds. The current circumstances make ELSS more appealing than many other fixed yielding instruments such as NSC or five-year bank fixed deposits given the fact that the rate of interest on such instruments may slide down. For a better understanding of our readers we have compared different options available under Section 80C so that they can take the right investment decisions

To help our readers who are yet to exhaust their full amount under Section 80C, we have come up with the top five ELSS’. Though all the funds are good, we advise you, in the interest of optimal diversification, to opt for at the most three funds depending upon your risk profile. Moreover, we also recommend going for the dividend option as it helps you to manage your liquidity in a better way.

Review of Portfolio 2012

As explained earlier, ELSS has a lock-in period of three years; therefore it does not make sense to review last year’s recommendation as it will only give you notional profit or loss. Hence, in this issue we are reviewing the recommendation we gave three years back i.e. in 2012 (Five Best Tax Saving MF Schemes, DSIJ Vol. 27, Issue Number 1, dated Jan 16 - 29, 2012). The average return generated by our recommendation was 92 per cent (after accommodating dividends paid in the last three years) compared to 72 per cent provided by the BSE Sensex in the same time. If we annualised them, this works to around 38.5 per cent, more than any other option available under Section 80C. If we include the tax advantage one availed in the year of investment, the yield will improve further. What is worth noting is that all the five recommendations made by us have outperformed the frontline indices.

AXIS LONG TERM EQUITY FUND

AUM Rs. 3199 CRORE ................................................ AS ON NOVEMBER 30, 2014

NAV Rs. 22.73 ...............................................................  AS ON JANUARY 06, 2015

Axis Long Term Equity Fund is the youngest ELSS scheme that we have analysed and in its short tenure of existence (inception date: December 29, 2009), the fund has proved its mettle. The fund has consistently outperformed its peers since inception and has remained among the top performers in its category. In the three years ending December 31, 2014 the fund has generated a return of 37.41 per cent against 27.82 per cent by the category and 21.39 per cent by CNX Nifty. Even in a shorter period of one year, the fund has yielded return of 66.7 per cent against 51.1 per cent by its category in the same period. What is notable is that such a performance has not been derived by taking extra risks.

The fund has been able to generate alpha (a risk-adjusted performance measure that represents the average return on a portfolio over and above the theoretical return predicted by CAPM model) of 14.5 while keeping its beta lower at 0.89 at the end of November 2014. The fund largely follows a bottom approach for stock selection and invests in a diversified portfolio with focus on growth companies that are mainly blue chips. Though the fund has the flexibility of investing across the market capitalisation spectrum of small, mid and large-cap companies, it has maintained a judicious mix of mid and large-cap companies to deliver superior returns for its investors.

At the end of November 2014, its large-cap constituted 57.4 per cent of the total portfolio while mid-cap companies shared the rest. The fund manager’s conviction in stock selection is reflected in the concentrated portfolio of 40 stocks, a large part of which have remained constant in the last one year with lower turnover ratio. Both, the number of stocks and turnover ratio, are below the average in the same category. Moreover, the top 10 stocks cover almost 49 per cent of the portfolio. Sector-wise, the weightage of the fund also reflects the concentration of investment. Its top two sectors alone constitute 43 per cent of the total portfolio. The fund does not take cash calls and 98 per cent of the assets remain invested in equity.

Looking at the historical performance and the portfolio construction of the fund, we believe the fund will continue to generate decent returns going forward without much of risk. Therefore, we advise this fund to all those investors who are risk aversive and want some good returns on their investments.

Birla Sun Life Tax Relief 96

AUM Rs. 1904 CRORE ................................................ AS ON DECEMBER 31, 2014

DIVIDEND (NAV):NAV Rs. 126.69 ................................................ AS ON JANUARY 06, 2015

Birla Sun Life Tax Relief 96 (BSLTR-96) remains one of the oldest and best performing ELSS schemes. Launched in March 1996, the scheme has given annualized return of 27.43 per cent. To present this return in perspective, had you invested `1000 at the launch of scheme today it would have become little more than Rs 78000. Baring in a seven year period, scheme has been able to beat the category returns in all time frames. For example in year 2014 the fund was able to outperform its benchmark by 19.07 per cent.

The reason behind such a performance is its tactical allocation of funds across sectors, stocks and market-caps. At the end of November 2014 almost 54 per cent of portfolio constitutes of giant and large cap and remaining 46 per cent is by mid and small cap. When asked to Mahesh Patil, Co-Chief Investment Officer, Birla Sun Life AMC, about the reason for such stellar performance he explained “focus on bottom-up stock picking and selection across sectors is helping the fund deliver superior risk adjusted returns for the unit-holders”.

In November 2014, the funds sectoral portfolio seemed concentrated as top three sectors that were financials, automobile and services, together contributed about 51 per cent of the total assets of the fund. Mahesh Patil explained that “the fund is bullish on most of the sectors linked to domestic economy like BFSI and capital goods will do well. Also, we are positive on some niche themes like Tourism, Media & entertainment.

However, at stock level fund is more diversified and top 10 stocks constitute 42.51 per cent of the total portfolio at the end of November 30. According to Mahesh Patil, “stocks are chosen on the basis of future earnings growth and relative valuation. We look at factors like quality of management, parentage, product range and pricing power, sustainable competitive advantage, competitive intensity, etc while evaluating stocks”. While the standard deviation of 15.47 per cent and sharpe ratio is at 1.45 indicates that the fund has produced relatively good risk adjusted returns with slightly lower volatility. Though, the fund has not remained in top performer, its long term track record overshadows that and hence this fund is suitable for the patient investors.

FRANKLIN INDIA TAXSHIELD FUND

AUM Rs. 1568 CRORE ......................................................................... AS ON NOVEMBER 30, 2014

DIVIDEND (NAV): Rs. 45.15 .................................................................... AS ON JANUARY 06, 2015

Franklin India Taxshield Fund is for those investors who value their sleep without bothering much about their investments. The fund has given consistent returns both in the falling market as well as in the rising market. If we take an example of the year 2008, which was particularly not well for the equity market, this fund took a beating of 49.22 per cent compared to 56.5 per cent by its benchmark BSE 500. This feat was again repeated in the year 2011 when the fund outperformed its benchmark and CNX Nifty by a huge 12 per cent and 9.43 per cent.

Nevertheless, the fund’s performance slips in the rising market, though it generates decent returns. In 2009 the fund gave return of 78.81 per cent against the category performance of 88.5 per cent. However, on a long-term basis the fund has beaten its category return by a huge margin. In the last five years the fund has generated return of 17.02 per cent compared to 12.75 per cent by category. The credit for such a performance goes to fund manager Anand Radhakrishnan and his disciplined approach. He follows a bottom-up, research-based, and dynamic ‘blend’ of growth and value.

According to Radhakrishnan, “We follow a bottom-up approach to stock selection based on fundamental research with a medium to long-term perspective and ignore momentum stocks. The parameters and factors used in evaluating a stock will vary depending on the specific business and the company’s competitive position within a sector.”

Coming back to the portfolio of the scheme, it is dominated by financials followed by engineering and automobile. The financials corner 31.6 per cent of the total portfolio. This huge share may be due to the expected good performance of the financials going forward. Commenting on sectoral allocation, Radhakrishnan states, “Our sectoral exposures are a derivative of the bottom-up stock selection process. At a broad level we are positive on the improving domestic consumption and the financial services sector.” Looking at the past performance and current portfolio construction, we advise our conservative readers to add this to their portfolio as this will provide stability to the asset returns.

RELIANCE TAX SAVER FUND

AUM Rs. 3618 CRORE ......................................................................... AS ON NOVEMBER 30, 2014

DIVIDEND (NAV): Rs. 22.23 ................................................................... AS ON JANUARY 06, 2015

There are some fund managers who do not follow the herd and manage their funds in their own set style which may defy the normal investment approach. The fallout of such an investment strategy is that you may not receive consistent returns but a few years of outperformance may cover up the lost ground and some more. Ashwani Kumar is one such fund manager who has been managing Reliance Tax Saver Fund since 2005 in a way that differs from other ELSS schemes. This has helped the fund to outperform its benchmark and peers over a long-term period.

In the last five years the fund has generated an annual return of 20.93 per cent as against 13.18 per cent generated by the category and 9.79 per cent by frontline indices. The fund remained a top performer among its category in three, five and seven-year periods. What helped the fund to post such an impressive performance is its additional weightage to mid and small-cap stocks rather than the large-cap stocks that occupy a major part of other ELSS schemes. Out of the 38 ELSS schemes analysed by us, this is the only fund with a major focus on mid-caps.

At the end of November 30, 70 per cent of its total portfolio was found invested in mid and small-caps compared to 15-30 per cent by its peers. The rest has been invested in large-caps while again marking a huge difference with its peers that invest almost 60-70 per cent in large-caps. This rather unusual strategy has resulted in an inconsistent performance of the scheme. As has been witnessed in the past, the scheme lags in terms of its benchmark over four years out of its total nine years of existence. Nonetheless, a few years of huge outperformance has kept the fund one of the top performers in its category when considered over a long time frame.

Moreover, its three-year lock-in period helps the manager to take such concentrated bets. A sector-wise analysis of the portfolio clearly shows where the concentration lies. The top ten holdings of the fund constitute 46.29 per cent of the total portfolio while the top two sectors corner a similar percentage of the portfolio. The fund manager takes significant underweight or overweight positions versus its benchmark S&P BSE 100 index.

The stock picking strategy adopted by the fund manager clearly favours those companies that have strong growth potential and are available at attractive valuations. Though the fund has generated good returns and remained a top performer in the long term, looking at the portfolio construction we believe that this fund is suitable only for aggressive investors with a higher risk appetite.

RELIGARE INVESCO TAX PLAN

AUM Rs. 223 CRORE ........................................................................... AS ON DECEMBER 31, 2014

DIVIDEND (NAV): Rs. 18.63 ................................................................... AS ON JANUARY 06, 2015

Swimming against the current is what matters; even a dead fish can go with the flow. Similarly in a bull market every fund worth its name can give decent returns; its performance in a bear market is what matters and differentiates it from the others. Religare Invesco Tax Plan is one such fund that has proved its resilience in both the rising as well as the failing market.

In 2008 and 2011, when the overall equity market gave a negative return, Religare Invesco Tax Plan, although it registered a negative return too, posted a fall that was lesser than the broader market as well as its benchmark. In 2008 when the overall equity market fell by 55.28 per cent, the fund was able to arrest its fall at 49.5 per cent. Similarly in year 2011 the fund outperformed its benchmark and frontline indices by 6.8 per cent and 5.7 per cent respectively.

What helps the fund to deliver such a stellar performance is the fund manager’s ability to effectively use large-cap and mid-cap stocks in its portfolio. Its large-cap allocation and higher exposure to defensive sectors provides the required stability to the fund’s performance while its investment in mid-cap companies provides the right growth avenues. Currently the fund has invested around 55 per cent in large-cap while 45 per cent is invested in the small-cap.

Moreover, the fund invests in high-quality brands that have good growth prospects. From the portfolio it seems that the fund is well-diversified and believes in a ‘buy and hold’ strategy. This is reflected in the lower turnover of the fund which is 20 per cent compared to an average 61 per cent in its category. All this has helped the fund generate alpha (8.63) for its investors at a lower beta (0.89).

The fund stays below the 50-stock mark for its portfolio and is currently well-diversified with 46 stocks. The sectors that currently dominate the portfolio are financial, technology, and services which together constituted 54.91 per cent of the portfolio at the end of November 2014. The top ten stocks constitute around 43 per cent of the total portfolio. Given its lower asset under management compared to other recommendations as also its past performance and portfolio construction, we recommend this fund to those investors who have little appetite for risk.