BEST TAX SAVING MUTUAL FUNDS-ELSS
Rama Krishna Vadlamudi January 18, 2010
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The last quarter of a financial year is very crucial as far as tax-saving equity schemes are concerned. During these three months from January to March, individual investors allocate most of the savings into ELSS (equity linked savings schemes) that provide tax deduction from taxable income under Section 80C of the Income Tax Act. So, it would be better if we know what are the best tax-savings schemes to invest in at this point of time.
Before we begin our analysis of the best tax-saving schemes, technically known as ELSS funds, it would be instructive to find out what are the funds that are at the bottom of the ELSS category:
Table 1. BOTTOM FIVE FUNDS ON 3-YEAR RETURNS BASIS
Sl.No. NAME OF THE FUND AAUM for Dec.09 CAGR*
Rs crore 1-year % 3-year % 5-year %
1 Fortis Tax Advantage Plan 74 81.36 (2.65) -
2 ING Tax Savings 48 115.71 (1.50) 17.92
3 LICMF Tax Plan 43 75.26 1.10 11.49
4 Principal Tax Savings 282 82.38 1.14 18.92
5 Escorts Tax Plan 5 79.03 2.33 17.13
CATEGORY AVERAGE NA 96.49 8.21 21.90
*As on January 15, 2010
As can be seen from the above table 1, while the category (ELSS) average return for three years is 8.21, the fund at the bottom delivered a negative return of 2.65 per cent – with a gap of more than 10 per cent CAGR in returns, which will be huge in absolute terms. Even if we compare the five-year performance, the category average is 21.90%, the worst performing scheme could deliver only 11.5 per cent CAGR – again with a huge gap of more than 10 per cent CAGR.
However, when you compare the returns of the best ELSS fund with the worst fund, the difference will be huge. On a three-year basis as on January 15, 2010, the topmost fund has delivered a return of 21.30 per cent and the worst fund (as given in table 1 above) gave a negative return of 2.65 per cent – with the gap between the worst and best being around 24 per cent. While selecting our funds, it’s better to know the funds at the bottom so that we could choose the best funds for our mutual fund portfolio, while avoiding the funds at the bottom.
LIST OF BEST ELSS SCHEMES
Table 2. THE FABULOUS FOUR!
Sl.No. NAME OF THE FUND LARGE/MID CAP Bias RISK GRADE NAV$
($ as on 15.01.2010)
Rs
1 Fidelity Tax Advantage Large 64%, Mid 35% Low 18.58
2 Franklin India Taxshield Large 67%, Mid 33% Low 182.96
3 HDFC Taxsaver Large 53%, Mid 47% Below Average 203.44
4 Sundaram BNPP Taxsaver Large 57%, Mid 43% Below Average 43.87
Notes: All are growth plans and NAV is for growth plans; and all are open-ended schemes
Table 3. More on the Fabulous Four!
Sl.No. NAME OF THE FUND AAUM for Dec.09 CAGR
Rs crore 1-year % 3-year % 5-year %
1 Fidelity Tax Advantage 1,134 98.60 13.26 -
2 Franklin India Taxshield 746 93.75 12.25 24.08
3 HDFC Taxsaver 2,084 115.49 10.72 27.82
4 Sundaram BNPP Taxsaver 1,270 89.65 14.60 28.11
CATEGORY AVERAGE NA 96.49 8.21 21.90
Notes: AAUM-Average assets under management; CAGR-compounded average growth rate; and returns as on 15.1.10
Other good funds include, Canara Robeco Equity Taxsaver, SBI Magnum Taxgain 1993 and Reliance Taxsaver. Though past performance may not be a guide to the future performance, it is expected that the funds are going to do well in future also. In the following pages, we shall discuss more on the performance and portfolio of these schemes:
1. FIDELITY TAX ADVANTAGE:
This fund was launched in January 2006 and it is managed by a veteran fund manager, Sandeep Kothari. The fund is tilted towards large cap stocks with a share of two-thirds in them. It is a conservative fund and the fund manager is known for his consistency and long-term view. He usually does not believe in keeping the assets in cash or cash equivalents. The top holdings in the fund as on November 30, 2009 are: Reliance Industries, HDFC Bank, ITC, SBI and Larsen & Toubro. It is betting on sectors: Financial Services, Energy and Pharma. Because of its higher exposure to large cap stocks, the risk is low.
2. FRANKLIN INDIA TAXSHIELD:
This fund was launched in the second quarter of 1999 and it is managed by an experienced fund manager, Anand Radhakrishnan. The fund is tilted towards large cap stocks with a share of two-thirds share in them. It is a conservative fund and the fund manager is known for his consistency and long-term view. The cash holding in the scheme is practically zero. The top holdings in the fund as on December 31, 2009 are: Infosys, Reliance Industries, Axis Bank, HDFC Bank, and Bharti Airtel. It is betting on sectors: Financial Services, Energy and Engineering. Because of its higher exposure to large cap stocks, the risk is low.
3. HDFC TAXSAVER:
This fund was launched in March 1996 and it is managed by a skilled fund manager, Vinay Kulkarni. Compared to the other two funds mentioned above, this fund’s exposure to mid cap stocks is much higher at slightly less than 50 per cent. The cash holding in the scheme is around four percent only and usually the fund does not keep much of its assets in cash. The top holdings in the fund as on December 31, 2009 are: ICICI Bank, SBI, Crompton Greaves, Dr Reddy’s Labs and TCS. The fund manager is overweight on sectors: Financial Services, Pharma and Technology. Because of its higher exposure to mid cap stocks, the risk is below average. However, the fund is well-known for protecting investor’s money during bear markets or severe downturns as was proved during 2008.
4. SUNDARAM BNP PARIBAS TAXSAVER:
This fund was launched at the end of 1999 and it is managed by a veteran fund manager, Satish Ramanathan. Like HDFC Taxsaver, this fund’s exposure to mid cap stocks is much higher at around 43 per cent. The cash holding in the scheme is zero. The top holdings in the fund as on December 31, 2009 are: Tata Motors, TCS, ICICI Bank, Mahindra & Mahindra and Cairn India. The fund manager is overweight on sectors: Energy, Financial Services and Technology. Because of its higher exposure to mid cap stocks, the risk is below average. In the last six months or so, the fund has increased its exposure to mid cap stocks as mid cap stocks have done much better than large caps during that period.
The following filters have been applied while arriving at the above set of funds:
1) The reputation of the particular fund house is considered before picking up individual schemes of that fund house
2) Experience and long-term track record of the fund manager
3) Consistency of returns during bear phases as well as bull markets
4) Long-term track record of the fund, say, more than three/five years
5) Only growth plans of open-ended, diversified equity mutual fund schemes are considered
There is not any entry load on any of the above schemes. With effect from August 1, 2009, entry loads are banned by the capital market regulator, SEBI. As of now, these schemes do not charge any exit load (3-year lock-in period).
Some Caveats before investing in ELSS schemes
1. ELSS schemes are subject to a lock-in of three years from the date of investment. It’s better to invest in growth options, rather than dividend options, if you are looking for long-term returns. Many a time, funds offer the bait of big dividends towards the end of the financial year to attract more retail investors into these schemes. Dividends are paid out of the NAV and as such investors do not derive any benefit out of them. After dividends, the NAV comes down to the extent of dividend paid.
2. ELSS schemes are eligible for tax deduction of up to a maximum of Rs one lakh under Section 80C of Income Tax Act.
3. If you’re in higher tax brackets of 20% or 30%, investment in these schemes is more beneficial. However, if you’re in 10% tax slab, it’s better to avoid them as they carry the risk of three-year lock-in. Instead, you can go for good and diversified equity mutual funds.
- - -
For calculating your tax liability and to know your income tax slabs, JUST CLICK:
Income Tax Slabs 2009-10--Resident Individuals, HUF, etc
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For knowing about good and well-diversified equity mutual funds, JUST CLICK:
Good and well-diversified equity MFs in India
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HOW TO CHOOSE EQUITY MUTUAL FUNDS
Before investing in an equity mutual fund, it would be better if investors take a hard look at the following five parameters:
1) Sustainable Performance: Consider the performance of the fund during several time periods – in a bear market as well as a bull market. Don’t consider only the recent performance. Take into account the returns over three/five year time periods.
2) Suitability: The investment objective of the fund must match with the objective of the individual investor. Mid-cap funds may not be suitable for some risk-averse investors. Likewise, investors with higher risk appetite may like to invest in mid-cap oriented funds.
3) Fund Manager’s Track Record: Watch the track record of the fund manager across various funds and different fund houses (if any)
4) Diversification: Check for the number of stocks and concentration of the portfolio. Too large a number of stocks or too less may not provide optimal returns for the investors in the long run.
5) Risk parameters: Look for Sharpe Ratio – which is statistical tool measuring risk-reward ratio. This ratio measures the amount of excess return for each unit of risk taken by the fund.
For a detailed article on picking up good equity mutual funds, just click:
http://www.scribd.com/doc/20712330
Some Caveats before investing in equity mutual funds
1) Read the Scheme Information Document (SID) and Statement of Additional Information (SAI) thoroughly before investing
2) MF performance is subject to market risk. During 2008, some good funds had lost only 40 to 45 per cent against the loss of around 50 to 52 per cent by the market. However, there are some funds which managed to lose more than 85 per cent of their NAV in just one year!
3) Time you keep your money in the market is more important than TIMING the market
4) The longer the time horizon of your investments, the lesser the risk
5) Regular investments through a Systematic Investment Plan (SIP) in the market during the bull as well as the bear phases will give better returns for long-term investors. It’s better to avoid lump sum investments to the extent possible.
6) Investors should invest a part of their savings or surplus as per their asset allocation. Asset allocation is a process whereby every investor shall allocate (depending on their own risk appetitie, risk profile, age, time horizon, investment objective, etc) funds to different asset classes, like, fixed deposits, PPF/NSC, equities, mutual funds, real estate, gold and others; in addition to life insurance and medical insurance
7) Before jumping into equities or equity mutual funds, consult your certified financial advisor and get his/her advice based on your investment objectives and needs
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Data source: ValueResearch
AUTHOR’S DISCLAIMER: This should not be construed as a recommendation by the author. The author holds a small stake in a few mutual fund schemes and as such it’s safe to assume that the author has a vested interest in general market going up. The views of the author are personal. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.
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