DSIJ Mindshare

Five best tax saving MF schemes

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%

Methodology

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.[PAGE BREAK]
FIDELITY TAX ADVANTAGE FUND

NAV: Rs 15.04  ............ As on 10/01/2012
AUM: Rs 1124 Crore  ............ As on 31/12/2011


he Fidelity Tax Advantage Fund serves well for those conservative investors who are satisfied with getting lower returns rather than having their principal to vanish in no time in a bad year.

Though the fund has been mandated to invest in Multi-Cap stocks, it is biased towards Large-Caps that are supposed to do well (i.e. fall less) in a falling market. If we take an example of 2008, which was particularly bad for equity markets, this fund took a beating of 50 per cent compared to 56.5 per cent by its benchmark BSE 200, while maintaining just five per cent in cash. Even now (as of November 30, 2011), almost 80 per cent of the entire portfolio consists of Large- and Mega-market cap stocks.

All of this does not mean that the fund’s performance slips in a rising market. In 2009, the fund yielded returns of 87 per cent, which was marginally lower than the category performance of 88.5 per cent. If we look at the long-term performance of the fund, it has beaten
its category returns by a huge margin. In the last five years, the fund has generated returns of 8.13 per cent as compared to 2.6 per cent by its category.

The credit for such performance goes to the fund manager, Sandeep Kothari, and his disciplined approach. He follows a bottom-up stock selection process, and invests in stocks across the market capitalisation range. Companies with a good business model and a strong balance-sheet, with high liquidity and good quality find their place in the portfolio. A majority of the fund’s portfolio is held for the longer term. The fund typically adopts a buy-and-hold strategy, in line with the medium and long-term views on the company.

Coming back to the portfolio of the scheme, it is dominated by Financials, followed by Energy and Healthcare. The share of Financials has come down from 25.88 per cent a year ago to 22 per cent currently, compared to 24.43 per cent on the Nifty. This fall may be due to the bad performance of Financials last year. One sector on which the fund manager is quite bullish is Healthcare. This is probably due
to the defensive nature of the sector, as it falls less during a market downturn. In the last one year, the weightage of this sector has increased from 9.68 per cent to 11.67 per cent, compared to 4.29 per cent on the Nifty.

In terms of stocks, ITC has replaced Reliance Industries as the top holding, and comprises 5.67 per cent of the total assets, with not a single stock holding exceeding six per cent of the portfolio. Currently, the portfolio is diversified well across 64 stocks, and the top 25 stocks accounts for 70 per cent of the assets.

We advise conservative investors to add this fund to their portfolio, as it will provide stability to their asset returns.

Top 10 Sector Weights (%)
Services 22.02
Financial 13.93
Energy 11.67
Healthcare 11.66
Technology 8.27
Diversified 7.97
FMCG 4.38
Automobile 2.83
Metals 2.5
Construction 2.34

Returns Fund  Category
6-Month -16.42 -17.59
1-Year -21.81 -23.81
3-Year 22.51 16.84

Top 10 Holdings As % of Assets
ITC 5.67
Reliance Industries 5.64
Infosys Technologies 5.17
HDFC Bank 4.76
Tata Consultancy Services 3.98
ICICI Bank 3.6
Rallis India 3.55
Cipla 3.48
Dr. Reddy's Labs
3.23
HDFC 2.76

[PAGE BREAK]
ICICI PRUDENTIAL TAX PLAN FUND

NAV: Rs 16.36  ............ As on 10/01/2012
AUM: Rs 1197 Crore  ............ As on 31/12/2011


The ICICI Prudential Tax Plan remains one of the oldest and the best-performing ELSS schemes. Launched in August 1999, the scheme has provided annualised returns of 22.17 per cent since then. To put these returns into perspective, if you had invested Rs 1000 at the launch of the scheme, it would have become around Rs 9000 today.

The returns have clearly helped the scheme to attract money in tonnes, and this is reflected in its assets under management (AUM), which have increased from Rs 72.05 crore to Rs 1197 crore currently – i.e. by an eye-popping CAGR of 36 per cent. Barring the last six months, the scheme has been able to beat the category returns in all time frames. The best returns were recorded in 2009, when it was the top performer in its category, and yielded returns of 112 per cent, outperforming the category by 23.43 per cent. The reason behind such a performance is its tactical allocation of funds across sectors, stocks and market caps. This strategy was adopted by its
fund manager Sankaran Naren, who has now handed over his responsibilities to other fund managers.

The new fund manager, Chintan Haria, has indicated that he will continue with a Multi-Cap strategy. Currently (as of November 30, 2011), almost 60 per cent of the fund’s portfolio constitutes of Mega- and Large-Cap stocks, while the remaining 40 per cent is in Mid- and Small-Cap stocks. The fund selects stocks on the basis of a combination of both the top-down and the bottom-up approaches. For
the top-down approach, it still relies on Sankaran Naren’s insight on selecting the right sector, whereas for the bottom-up approach or for selecting stocks, it relies on analyst recommendations. This fund normally follows a growth style of investing.

In December 2011, the fund seemed to be too concentrated sectorally, as the top three sectors, viz. financials, technology and energy, together accounted for around 43 per cent of the total assets of the fund. Even at the individual level, the top three holdings (Reliance
Industries, ICICI Bank, Infosys Technologies) constitute a little less than a quarter of its entire assets. The performance of these stocks will significantly impact the fund’s performance. A standard deviation of 26.21 per cent and a Sharpe ratio of 0.83 indicate that the fund has produced relatively good risk-adjusted returns with slightly lower volatility. Nonetheless, given the fund’s high concentration in a few stocks and sectors and the lesser experience of its current fund manager (who has been managing the fund since May 2011), we would recommend this fund only to aggressive investors.

Top 10 Sector Weights (%)
Energy 16.23
Financial 14.41
Technology 11.92
Healthcare 9.51
Metals 8.94
Engineering 8.29
Automobile 5.41
Diversified 3.32
FMCG 3.17
Chemicals 2.18

Returns Fund  Category
6-Month -16.52 -16.25
1-Year -20 -21.07
3-Year 25.35 16.81

Top 10 Holdings As % of Assets
Reliance Industries 8.26
ICICI Bank 7.95
Infosys Technologies 7.47
Sterlite Industries 3.99
Tata Steel 3.27
Oracle Fin Serv Software 2.98
Cairn India 2.81
Larsen & Toubro 2.54
Tata Power 2.53
Cadila Healthcare 2.48

[PAGE BREAK]
HDFC TAXSAVER FUND

NAV: Rs 50.67  ............ As on 10/01/2012
AUM: Rs 2880 Crore  ............ As on 31/12/2011


The HDFC TaxSaver Fund, one of the largest funds (in the ELSS category) from India’s largest asset management company, also happens to be one of the best performers over the years. In the last three-year, five-year and 10-year periods the fund has remained in the top quartile, outperforming its category by a huge margin. In the same time periods, the fund has generated excess returns over
its category by 697, 291 and 606 basis points respectively. These returns were not generated by taking any extra risk, which is denoted by its Sharpe ratio (risk-adjusted returns) that stands at 0.83 for the last 10 years.

What also makes this fund different from others is its unconventional stock selection, which is different from that of its peers and index. For example, Reliance Industries (RIL), which forms part of all other portfolios, is conspicuous by its absence in the HDFC TaxSaver Fund. This may be one of the reasons why the fund performed well last year, as RIL was one of the worst performers during that period, having declined by 36 per cent. Similarly, it has a cash holding of 9.61 per cent, which is higher than what its peers hold. It is also among the few funds that have invested in the Standard Charted IDRs (Indian Depository Receipts).

In 2007, the fund underperformed its benchmark by a huge 23.07 per cent, being underweight on the Energy and Metals sectors that were star performers during that year. However, the long-term performance of the fund gives confidence in its fund manager’s stock-picking ability. In terms of their style, they invest primarily in Large- and Mid-Cap stocks that constitute roughly 95 per cent of the portfolio. The fund manager, by and large, invests in growth stocks.

The current portfolio of the scheme is diversified well among different sectors, with a relatively higher weightage towards defensive sectors like Healthcare and FMCG as compared to the weightage they have on the Nifty. For example, Healthcare constitutes 10.95 per cent of the portfolio as compared to 4.29 per cent on the Nifty. The largest holding that the fund has is in State Bank of India (again unconventional), and the top 10 holdings form 38.14 per cent of its total portfolio.

Considering the investment style of the fund manager and the fund’s past performance, along with a good risk-adjusted returns ratio, we recommend this fund for your core portfolio.

Top 10 Sector Weights (%)
Financial 13.44
Energy 12.05
Healthcare 11.12
FMCG 10.78
Technology 10.26
Engineering 6.83
Communication 3.74
Services 3.59
Automobile 3.32
Metals 3.04

Returns Fund  Category
6-Month -17.06 -16.25
1-Year -19.3 -21.07
3-Year 23.75 16.81

Top 10 Holdings As % of Assets
State Bank Of India 5.96
ITC 5.61
Tata Consultancy Services 5.6
Infosys Technologies 4.66
Bharti Airtel 3.74
Bharat Electronics 2.79
ICICI Bank 2.62
NTPC 2.56
Bank of Baroda 2.42
Ipca Laboratories 2.37

[PAGE BREAK]
TATA TAX SAVING FUND

NAV: Rs 39.95  ............ As on 10/01/2012
AUM: Rs 123.88 Crore  ............ As on 31/12/2011


The Tata Tax Saving Fund, headed by Pradeep Gokhale, focusses on Large- and Mid-Cap companies. The scheme seeks long-term capital growth. Investments in equity would be at least 80 per cent of the corpus, while allocation to debt and money market instruments can go up to 20 per cent. At present, the fund has invested almost 92 per cent of its corpus in equity and the rest is in cash.
The scheme has no exposure to debt instruments.

In the last five year period, the fund has been able to beat its category in all time frames. In the last one year, it has outperformed its category by 534 basis points, and stands at negative returns of 17.04 per cent as against the category returns of negative 22.38 per cent. If we compare this to its benchmark Sensex, the fund has outperformed by 568 basis points. The fund has been able to generate annualised returns of 3.32 per cent in the last five years, compared to 2.6 per cent generated by the category.

The current portfolio of the scheme consists of 41 equity stocks. The maximum weightage has been given to the Financials sector (18.35 per cent), followed by the Energy and FMCG sectors that have a weightage of 17.68 per cent and 12.15 per cent respectively. The top three sectors have a weightage of 48.18 per cent in the total portfolio, while the top five sectors have a weightage of 66.2 per cent.The net assets under management of the scheme stand at Rs 124 crore as on December 31, 2011. The top five companies that the scheme holds are Hindustan Unilever, ITC, Infosys Technologies, HDFC Bank and ICICI Bank.

The fund follows an investment philosophy that seeks to provide long-term capital gains along with tax benefits to unit holders by investing in Large-Cap stocks with a growth orientation. If we look at the portfolio, we find that the scheme has invested a lion’s share of its assets in Large-Cap stocks that mainly form a part of the Sensex too, which is its benchmark. Of its total corpus, 80 per cent is invested in Mega and Large-Cap stocks. Therefore, the fund has a direct correlation with the same, and its performance is also likely to depend on the movement of the Sensex.

Looking at the data, we feel that the fund has been able to stick to its investment philosophy. Investors who are looking for aggressive schemes and also for tax planning may look to invest in the scheme either on a lump sum basis or by taking the SIP route, which is also available.

Top 10 Sector Weights (%)
Financial 18.35
Energy 17.68
FMCG 12.15
Automobile 9.38
Technology 8.64
Healthcare 6.59
Engineering 4.89
Services 4.38
Communication 3.78
Diversified 2.98

Returns Fund  Category
6-Month -13.72 -17.59
1-Year -18.62 -23.81
3-Year 19.16 16.84

Top 10 Holdings As % of Assets
Hindustan Unilever 5.6
ITC 5.28
Infosys Technologies 4.97
HDFC Bank 4.89
ICICI Bank 3.87
Bharti Airtel 3.78
Bajaj Auto 3.57
Cairn India 3.22
Reliance Industries 3.07
HCL Technologies 2.92

[PAGE BREAK]
HSBC TAX SAVER FUND

NAV: Rs 11.50  ............ As on 10/01/2012
AUM: Rs 202 Crore  ............ As on 31/12/2011


HSBC Tax Saver scheme has found a place in our list of best ELSS schemes more due to its current portfolio, rather than for the returns posted in the past. However, this does not mean that the fund has significantly underperformed its category in the past. In the last three years, the fund has yielded returns of 17.35 per cent annually against its category returns of 17.66 per cent. If we consider its performance since inception (January 2007), it has provided 5.47 per cent returns against 4.66 per cent generated by the Nifty and 4.27 per cent by its benchmark, BSE 200. In its recent performance though, it has been well outperforming the category returns. For example, in the last three month and six month period, the fund has been down by 1.78 per cent and 14.41 per cent respectively, compared to a fall of 4.02 per cent and 16.31 per cent witnessed by the category in the same period.

What explains this superior performance is its current portfolio. The top three sectors that dominate its current portfolio are Financials (17.36 per cent of the total assets), Technology (12.78 per cent) and Energy (12.69 per cent). However, what really drives the performance is right stock picking. In Technology, the fund holds only two companies, Tata Consultancy and Infosys, which are among the best performers of 2011. In Financials too, the fund holds the most stable stocks like HDFC and HDFC Bank. We believe that at least the first half of 2012 will remain volatile, and in such a scenario, stocks like these will help the fund post stable returns. This is further reiterated by the past standard deviation of the fund, which stands lower than its peers at 24.04 per cent. The scheme slightly
concentrated and contains only 34 stocks, of which the top 10 constitute around 47 per cent. In terms of sectors, the top three sectors make up 43 per cent of the entire portfolio.

The investment style followed by the fund manager is biased towards Large-Caps, and mostly concentrated in growth stocks. Almost 80 per cent of the portfolio is made up of Mega- and Large-Cap stocks, and the rest is shared by Small and Mid-Caps. Aditya Khemani has been managing this fund since February 2009, and during his tenure, it has consistently managed to give good returns. Khemani also manages two other schemes at HSBC along with other fund managers, and these have also done well over a longer period of time.

Thus, looking at the current portfolio and its lower volatility, an investor with low-to-moderate risk appetite can take limited exposure to this fund.

Top 10 Sector Weights (%)
Financial 17.36
Technology 12.78
Energy 12.69
FMCG 9.83
Automobile 9.66
Healthcare 6.66
Diversified 5.23
Construction 5.08
Communication 3.74
Metals 3.53

Returns Fund  Category
6-Month -14.41 -16.31
1-Year -22.73 -22.38
3-Year 17.35 17.66

Top 10 Holdings As % of Assets
Tata Consultancy Services 6.74
Infosys Technologies 6.04
HDFC Bank 5.62
ITC 5.31
Reliance Industries 5.29
Bosch 4.22
Bharti Airtel 3.74
ICICI Bank 3.71
Larsen & Toubro 3.46
HDFC 3.3

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