NFO Analysis: Parag Parikh Tax Saver Fund

PPFAS Mutual Fund has launched yet another equity mutual fund scheme after a gap of more than six years. PPFAS Mutual Fund currently has two schemes one is Parag Parikh Long Term Equity Fund, which is a multi-cap fund and another is Parag Parikh Liquid Fund. This time around Parag Parikh is coming up with its ELSS (Equity Linked Saving Scheme) viz. Parag Parikh Tax Saver Fund. This new open-ended ELSS scheme is open for subscription from July 4, 2019 and closes on July 18, 2019, which again reopens on July 26, 2019.

Here the fund will follow its multi-cap strategy to build its portfolio and will be investing in large-cap, mid-cap and small-cap stocks with no market cap bias whatsoever. However, the only difference would be that as per the SEBI (Securities and Exchange Board of India) guidelines it cannot invest in international markets unlike its multi-cap fund Parag Parikh Long Term Equity Fund which invests even in international markets.

Objective:
It is an open-ended equity linked saving scheme with a statutory lock-in period of three years and tax benefits under Section 80C. The investment objective of this scheme is to generate long-term capital appreciation through a diversified portfolio of equity and equity-related securities where the scheme does not guarantee or assure any returns.

Asset Allocation:
Under normal circumstances, the scheme’s asset allocation (per centage of net assets) will be 80 per cent to 100 per cent in equity and equity-related instruments and 0 per cent to 20 per cent in debt and money market instruments.

Benchmark:
The performance of the scheme will be benchmarked against Nifty 500 TRI. This the same benchmark index against which its multi-cap fund (Parag Parikh Long Term Equity Fund) is benchmarked.

Investment Strategy:
As the investment objective of the scheme is to generate long-term capital growth, the investment portfolio, primarily of equity and equity-related instruments, would be actively managed with a long-term perspective. The scheme intends to invest in a diversified portfolio of strong growth companies having sustainable business models.

The scheme will follow a bottom-up stock selection process, where the major focus would be on appreciation potential of individual stocks from a fundamental perspective. The research process that PPFAS Mutual Fund analyses the appreciation potential of each stock in its universe on a fundamentals-based, where the universe of selected stocks has a robust business model and enjoys sustainable competitive advantages over its peers. The fund will have the flexibility to invest across the market capitalisation.

Fund Manager:
The scheme will be collaboratively managed by Rajeev Thakkar who is Chief Investment Officer (CIO) along with equity fund manager of PPFAS Mutual Fund, Raunak Onkar who is a dedicated fund manager for overseas investments and Raj Mehta who is a debt fund manager. The common fund managed by all the three fund managers is Parag Parikh Long Term Equity Fund that had AUM of Rs. 1,896.70 crore at the end of May 2019 and gave a return of 6.54 per cent in the last one year compared to its benchmark that generated 7.74 per cent in the same period. Another fund viz. Parag Parikh Liquid Fund is solely managed by Raj Mehta which had AUM of Rs. 268.20 crore at the end of May 2019 and in the last one year has generated 6.34 per cent returns.

Our Recommendation:
There is a high probability that the top 10 stocks that this scheme would hold would be similar to its multi-cap fund. Though the proportion might differ as this scheme being ELSS would not invest in international markets. Parag Parikh Long Term Equity Fund invests in 29 companies including those from international markets and 42.89 per cent, 10.03 per cent and 12.31 per cent is invested in large-cap, mid-cap and small-cap stocks. That said, there is a possibility that this scheme (Parag Parikh Tax Saver Fund) would follow the same footsteps except for investment in stocks from international markets. Average one year returns of 40 ELSS schemes is 5.75 per cent and those who are benchmarked against Nifty 500 TRI is 6.86 per cent. On the other hand, 42 multi-cap funds gave returns of 6.49 per cent, whereas those multi-cap funds who are benchmarked against Nifty 500 TRI gave 8.39 per cent returns.

Although the funds (multi-cap fund and ELSS) benchmarked against Nifty 500 TRI gave better returns, this scheme is not advisable for everyone. Since the Parag Parikh Long Term Equity Fund invests in 29 companies, they are prone to concentration risk and any bad selection is likely to spoil the returns of the fund and if the ELSS is going to be on the same path then they also may be prone to this risk. Hence, this scheme is for moderate risk takers who are looking for tax-saving instruments.

We believe that before investing in any fund you should check if it suits you in terms of your risk and returns appetite. For someone who believes that he needs an ELSS fund for tax benefits, there are other funds with a longer history to analyse and choose from.