Five best tax saving MF schemes
1/13/2012 12:59 PM Friday
The countdown to yet another financial year-end has begun, and so has the time started ticking for tax payers to do their tax planning, especially for salaried individuals. An ideal tax saving instrument should provide a person with higher returns, good liquidity and obviously, tax saving. One instrument that comes closest to satisfying these criteria is the equity-linked saving schemes (ELSS).
One may point to the fact that equity has provided negative returns last year, but it has to be kept in mind that these investments are made with a minimum time horizon of three years. Their returns may be negative for a brief period of time, but when we consider a longer term, they tend to generate better returns than other available options like PPF (Public Provident Fund), NSC (National Saving Certificate), etc.
If we look at the last three years’ returns generated by these schemes, it is at 18 per cent p.a., whereas other instruments have not even crossed the 10 per cent mark. When we consider liquidity, they have a lesser lock-in period of three years as compared to 15 years for PPF and five years for NSC. These are some of the reasons why investment in ELSS schemes has grown very fast in the last
few years. However, a deeper analysis shows that it is generally the last quarter of the financial year when investment in ELSS increases significantly. During last year (2011), on an average, the schemes mopped up less than Rs 200 crore during the months between April- December, but that increased by two times in the months of January and February and four times in March.
Currently, there are 47 ELSS on offer for investors, including 12 close-ended schemes. They constitute a little more than four per cent of the total assets under management (AUM) of the mutual fund industry, which stands at Rs 26000 crore. Nonetheless, this financial year might be the last time when one can benefit from these tax saving instruments. If the Direct Tax Code (DTC) is implemented in the next financial year (FY13) in its present format, you will not be able to claim tax deduction for investment in these schemes. However, those investing a lump sum till March 31, 2012 will be able to get tax benefits.
Now the question is what will happen to those investors who are investing through the SIP route? We think that the fund will remain for a while, and then it might be merged with some other fund. But this will give rise to other complications, and there is still no clarity on
some factors. For instance, if someone wants to redeem his/her units, what will be the tax implication if the mandatory lock-in period is not completed? Hence, we believe that it is very unlikely that the DTC will be implemented from the start of the next fiscal. This sentiment is also echoed by Nishith Desai, Founder, Nishith Desai Associates, a research-based international law firm. Desai says, “DTC will, most probably, not get implemented from April 2012. It will take at least one or two more years to get through the DTC.”
Therefore, as per our yearly exercise, we have come up with five funds that will not only help you in saving tax, but also in increasing your wealth over the years to come. Our regular readers must note that we have already given two best funds in our last issue of DSIJ (Issue No. 2., dated January 15, 2012)
under the section ‘Fund Of The Fortnight’, and hence, we are skipping those funds.DSIJ Creating Alpha
As discussed above, investment in ELSS has a lock-in period of three years. With that in mind, reviewing last year’s performance will not serve the purpose, as it will only reflect notional profit or loss. Hence, we are reviewing the performance of our recommendations or the year 2009 (Best Tax Saving Mutual Funds, DSIJ Vol. 24, Issue No. 4)
. The average returns generated by our recommendations were 77 per cent, compared to 69 per cent returns given by the Sensex in the same period. However, the outperformance will increase further if we take the tax benefit (assuming a marginal tax rate of 30 per cent) enjoyed by investing in such funds into consideration.
Back of the envelope calculations suggest 153 per cent returns, if we account for the 30 per cent tax benefit availed by the investor.
| || || ||Dividend || |
|Schemes ||Reco (12/02/09) ||Current NAV (09/01/12) ||2009 ||2010 ||2011 || Returns |
|Sundaram BNP Paribas Tax Saver ||22.39 ||35.72 || || || ||60% |
|SBI Magnum ||28.39 ||30.46 ||0.28 ||0.4 ||0.4 ||45% |
|HSBC Tax Saver ||6.92 ||11.13 ||0 ||0.1 ||0 ||75% |
|Reliance Tax Saver ||9.16 ||11.87 ||0.15 || ||0.15 ||62% |
|HDFC Tax Saver ||89.22 ||192.6 || || || ||116% |
|Franklin India Taxshield ||90.58 ||186.21 || || || ||106% |
|Average || || || || || ||77% |
|Sensex ||9559 ||16165 || || || ||69% |
To start with, we took the entire universe of equity-linked saving schemes. After that, we applied different filters.
The first filter that we applied was the time of existence of the funds. We considered only those funds that have been in existence for more than three years, and whose corpus size is more than Rs 100 crore. Next, we ranked the schemes based on their performance in four time periods of three months, six months, one year and three years.
Then, we ranked them by providing weightage, with 50 per cent weightage given to the three-year rank, 30 per cent to the one-year rank and 10 per cent each given to the six-month rank and the three-month rank. The logic behind providing this weightage to the returns was to give more importance to those funds that have consistently performed well over the long term.
Then, we considered certain softer issues, such as the performance of the funds that are being managed by the same fund manager. For proper diversification, we selected only one fund from each fund house.
Thus, we arrived at the five best funds that have not only performed well in the past, but are expected to perform better in these trying times as well.
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