The Best Of ELSS Investments For 2013
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Your investments for the future can also help you save on taxes. ELSS funds bring to you the best of investment and tax benefits. Shashikant and Saikat Mitra tell you more about the best ELSS funds to invest in 2013.
It’s that time of the year when most salaried individuals must be receiving requests from the HR department of their companies to submit investment proofs. This is a wake-up call for most of them, and this is when their search for tax saving instruments starts.
Although, there are many tax saving instruments that provide tax benefits under Section 80C of the Income Tax Act, 1961, Equity Linked Saving Schemes (ELSS) provide the best of both worlds, i.e. tax savings as well as investment. While other instruments like PPF and NSC also offer tax savings,they do not provide the upside provided by ELSS.
It is true that ELSS funds bear higher risk and volatility as compared to other tax saving avenues. However, this very factor makes them stand out as the best tax saving products, as the so-called low risk instruments cannot do enough to help you beat the risk of ever-rising inflation that can eat into your savings.
There are two factors that weigh the balance in favour of ELSS, Dhirendra Kumar, CEO, Value Research Online explains. First, he says, “The Indian investor does not have meaningful equity exposure, and therefore, it should be a part of their portfolio, and ELSS should be the first choice to start with while investing in the equity market”.
The second point to be considered is that investment in equities should be done with at least a three-five year time horizon. ELSS are designed with a lock-in period of three years, and hence, force the required discipline for equity investment. In this respect, Kumar says, “We have conducted a study where we have studied the average returns with a three year holding period for the last 10 years. We have found that the returns have ranged from 7-28 per cent and the median return is 17 per cent. This means that if the holding period is for five years, the average returns will be as high as 17-18 per cent”.
There are reports that the Direct Tax Code (DTC), if implemented in the current format, will do away with tax claims under investment in these schemes. However, there is no clarity yet with regard to when this will be implemented. As of now, investors who choose to invest lump sums in such schemes can avail themselves of the tax benefit. However, those who choose to invest via the SIP route could be affected by the DTC as and when it comes into force.[PAGE BREAK]
Performance Review
The investment in ELSS, as we all know, is locked in for three years and hence, reviewing last year's performance will be worthless as you cannot sell the units and book profits (if any). Since ELSS recommendation is our yearly exercise, this time we will be reviewing what we recommended in 2010. The average return provided by our recommended five ELSS is 21 per cent against the Sensex return of 14 per cent in the same period. However, if we consider the impact of tax saved, the yield will be much higher. All the funds have beaten the Sensex performance barring Birla Sun Life Tax Relief 96, which remained a drag on the overall return. The best return was provided by Fidelity Tax Advantage (now named L&T Tax Advantage after L&T Finance bought Fidelity’s mutual fund business in India), which has yielded a total return of 27 per cent since our recommendation.
As part of our yearly exercise, we are providing a list of the five best ELSS funds for investment. Individuals are advised to invest in a maximum of three schemes according to their risk profile. Adding more schemes will not diversify risk significantly, and moreover, having fewer schemes will eliminate the need to track performance and churn the portfolio post the lock-in period.[PAGE BREAK]
DSPBR Tax Saver
This is one of the funds whose turnover rate matches the turnover of the fund manager. Since July 2011, the fund manager has been changed twice and the fund has a turnover ratio of 127 per cent. Nonetheless, the turnover doesn’t seem to be impacting the performance of the fund adversely. In the last one year, the fund has generated returns of 28.65 per cent against the average category returns of 21.34 per cent. Even in the last three years’ performance, the fund has been able to beat the category returns by 126 basis points.
The reason for such outperformance lies in the investment process, which has remained unchanged regardless of the individual managing the fund. The stocks for the fund are picked up by applying a combination of the bottom-up and top-down approaches, with a focus on growth-style stocks. Top-down analysis is done primarily to identify the sectors, and then, stocks are selected from those sectors.
The fund is not tilted towards any particular market-cap and the fund manager has the discretion to select from small, mid or large-cap stocks. At the end of December 2012, 56 per cent of the total asset comprises large-caps and rest is made up of mid and small-caps. Such substantial exposure to mid and small-caps has led the fund to be more volatile as compared to its peers. This is reflected in its historical performance. In the year 2008 for example, when the broader market fell by 51 per cent, the fund fell by 56 per cent. However, its fortunes changed in the next year (2009) when the broader market went up by 76 per cent, the fund return was 84 per cent.
Although, the selection of stocks for the fund follows a definite process, the final call is that of the fund manager. The fund is currently performing well, and is being managed by Apoorva Shah, an experienced fund manager who has been with the company since 2006 and also manages six other funds. This adds to our conviction that it will perform better in the future, more so given its track record of outperforming the indices in rising market conditions.[PAGE BREAK]
IDFC Tax Advantage (ELSS)
Launched in December 2008, IDFC Tax Advantage remains one of the youngest funds. It is also one of the smallest funds, with a corpus size of Rs 160 crore at the end of December 2012. However, the fund, which is managed by Neelotpal Sahai, has emulated the maturity of its bigger peers and has consistently outperformed its category returns as well as the broader market. In last three years, the fund has given annualised returns of 10.52 per cent compared to 7.62 per cent by the category. Comparing the returns from the broader market, in each of the last three calendar years, the fund outperformed the S&P CNX Nifty. Even in 2011, when the Nifty fell by 25 per cent, this fund was able to arrest its fall to 23 per cent.
The fund’s investment strategy revolves around investing in a concentrated portfolio of around 20-50 stocks and utilises bottom-up stock picking. Currently, the fund has a portfolio of 31 stocks. The concentration is strongly tilted towards growth stocks, with a mix of large and mid-cap companies.
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 40 per cent of its total assets. The strategy seems to have worked well with the fund and helped it to outperform the market. Currently, the fund manager is bullish on financials, which constitute 28.43 per cent of the fund’s total assets, followed by healthcare, which makes for 16.99 per cent of the portfolio.
Beside this fund, Sahai manages two others, viz. IDFC India GDP Growth Fund and IDFC Tax Saver. Both these funds are performing well and have outperformed the category returns over a longer time horizon. Thus, looking at this fund’s portfolio and its performance over the years, investors with a high risk appetite can take limited exposure to it.[PAGE BREAK]
Franklin India Taxshield
Franklin India Taxshield–Dividend enjoys wide acceptability among investors. This can be substantiated by the fact that the corpus of the fund has witnessed a CAGR of 23 per cent from 2003 till 2012, going from Rs 144.94 crore to Rs 905 crore in the said period. The objective of the fund is to seek medium to long-term growth of capital, with income tax rebate. The scheme invests in equities and has exposure to PSU Bonds and debentures and money market instruments.
The fund is jointly managed by Anand Radhakrishnan (since 2007) and Anil Prabhudas (since February 2011). The reason for selecting this fund is its strong performance. If we look at the five-year, three-year and one-year performance, we find that the fund has outperformed its category by substantial margins in all these periods. While this fund will not give you an exciting ride up during rallies, its USP is that it stems the downfall during a downslide.
At the current juncture, the fund has invested 92.24 per cent in equities, 0.03 per cent in debt and is sitting on 7.73 per cent of cash. It considers the S&P 500 index as its benchmark. The fund is mainly invested in large-cap stocks, in fact to the extent of 64.69 per cent of its total portfolio, which provides liquidity at any point of time. The rest is invested in mid-cap (29.31 per cent) and small-cap stocks (5.83 per cent).
The top three sectors that constitute around 50 per cent of the portfolio are Financials (24.75 per cent), Energy (12.99 per cent) and Healthcare (12.17 per cent). The Sharpe Ratio stands at 0.38x, which is quite reasonable.
We believe that the fund will witness better performance going forward and one can definitely invest in this scheme.[PAGE BREAK]
Axis Long Term Equity
Starting off in the year 2009, the corpus of this fund has increased from Rs 0.14 crore in 2009 to Rs 369.05 crore. This is indeed stupendous growth as far as the assets under management are concerned. The main objective of the fund is to generate regular long-term capital growth from a diversified portfolio of equity and equity-related securities. The fund has been managed by Jinesh Gopani since April 2011.
This is one of the newest funds in its category, and is backed by better performance across its peers. In the last three-year, one-year and six-month periods, it has outperformed its category returns. In 2010, when the Sensex delivered returns of 17.43 per cent and its category yielded 19 per cent, this fund outpaced them both to give 30 per cent returns. The fund has proved its capability in bad times too. When Sensex fell by around 25 per cent in 2011, this fund restricted its fall to 15 per cent and also fared better than its category, which fell by 24 per cent.
At present, the fund has invested 96.03 per cent in equities and holds the rest in cash and cash equivalents. The fund considers the BSE 200 index as its benchmark. It is mainly invested in large-cap stocks to the extent of 54.19 per cent of its total portfolio. Mid cap stocks constitute 33.13 per cent of its investments and small-cap stocks make up 11.97 per cent.
The top three sectors that form around 50 per cent of the portfolio are Financials (25.27 per cent), Automobiles (12.07 per cent) and Healthcare (11.75 per cent). The Sharpe Ratio stands at 0.56x, which is quite reasonable.
Investing in this fund will bring you gains from tax benefits as well as the dividends that it declares.[PAGE BREAK]
ICICI Prudential Tax Plan Regular
In the last 10 years, the corpus of the fund has witnessed a CAGR of 50 per cent to stand at Rs 1467.98 crore as against Rs 37.22 crore in the year 2003. The main objective of the fund is to seek long-term capital appreciation by investing approximately 90 per cent of the investments in equity instruments, while the balance 10 per cent would be a parked in debt, money market instruments and cash. The fund is jointly managed by Chintan Haria (since May 2011) and Atul Patel (since May 2012).
The fund tends to perform in bouts but definitely impresses over the longer term. After witnessing some good performance from 2003 and 2005, it hit a rough patch between 2006 and 2008. In 2009 and 2010, it was a top quartile performer, only to become a middle of the road one in 2011. The fund has been able to outperform its category returns in the five-year, three-year, one-year and six month periods by a hefty margin.
As of December 2012, the fund has invested 91.35 per cent in equities and is sitting on cash to the extent of 8.65 per cent. The fund considers the S&P 500 index as its benchmark. It is mainly invested in large-cap stocks to the extent of 59.31 per cent of its total portfolio, which provides better liquidity and an exit opportunity if required. The rest is invested in mid-cap (22.20 per cent) and small-cap stocks (18.31 per cent).
Financials (15.73 per cent), Energy (14.29 per cent) and Metals (11.66 per cent) are the top three sectors that add up to 41.68 per cent of its portfolio. The Sharpe Ratio stands at 0.27, which is quite reasonable.
This fund will witness better performance in the time to come.