Maximise Your Wealth With The Top 5 Equity-Linked Savings Schemes
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Salaried employees must have started receiving reminders from their respective HR departments to submit their proofs of investment. This acts as wake-up call for most of us who are yet to exhaust the investment limit under Section 80C of the Income Tax Act 1961, which allows for tax deduction upto Rs 1 lakh worth of investments.
Therefore, if you are in the highest tax bracket of 30 per cent, you can save tax of Rs 30000 by investing in the various options under Section 80C like Public Provident Fund (PPF), life insurance premiums, home loan principal repayment, five-year bank fixed deposits, children’s education expenses, etc. In addition to the above, one of the most exciting options available for investors are Equity-Linked Saving Schemes (ELSS).
What distinguishes ELSS from other options in the section is that investment in this instrument not only provides tax savings but also gives a theoretically unlimited upside, whereas this is capped in other cases. Needless to say, this upside comes with the usual caveat that investment in equities carries higher risk and volatility as compared to other tax-saving options under this section. In the long run, however, equities have given positive returns.
For example, in the past five years, ELSS have provided average returns of 18 per cent. In fact, our recommendations have performed better than average ELSS returns over the past three years (Refer to box: Reviews).
Investing in ELSS is the right way to start investing in equities. Investment in this asset class requires a disciplined approach as well as a long-term view, and ELSS takes care of both these considerations. Investment through mutual funds provides the required discipline and the lock-in period of three years gives the necessary timeframe for the portfolio to perform, as equity investments may be volatile in the short term.
To help those readers who have not yet exhausted their full amount under Section 80C of the Income Tax Act, 1961, we have come up with the top five ELSS (Read more about our ‘Methodology’ ahead). These funds will help you not only to save tax, but also to build wealth. In the interest of optimal diversification, we would advise you to opt for three funds at the most, depending upon your risk profile.
Review Of 2010 Portfolio Recommendation
Investment in ELSS has a lock-in period of three years. With that in mind, reviewing last year’s performance will not serve any purpose – it will reflect only notional profit or loss as investors cannot book profits. Therefore, it makes sense to review the performance of our recommendations for the year 2010 (Best Tax Saving Mutual Funds, DSIJ Vol. 25, Issue No. 3, dated January 31, 2010).
The average returns generated by our recommendations were 26.7 per cent, compared to 20.2 per cent returns generated by the Sensex in the same time.
The compounded annualised returns of these funds stood at 7 per cent, better than that of many other tax-saving instruments available. Out of the total five recommended schemes, four have outperformed the frontline indices. Considering the tax benefits that one availed in the year of investment, a back of the envelope calculation shows that the returns would be around 72 per cent.
| Performance Review |
| Funds | NAV (Rs)
20/12/2013 | Rec NAV
(Rs) | Dividend In
Last 3 years | Total Returns
(Rs) | Returns
(%) |
| A | B | C | D | B+D |
|
| ICICI Prudential Tax Plan | 19.56 | 18.42 | 5.00 | 24.56 | 33.33 |
| HDFC Tax Saver | 51.60 | 61.92 | 24.00 | 75.60 | 22.09 |
| Birla Sun Life Tax Relief 96 | 84.20 | 88.41 | 15.50 | 99.70 | 12.77 |
| Religare Tax Plan | 14.21 | 12.81 | 2.75 | 16.96 | 32.40 |
| Fidelity Tax Advantage | 18.43 | 16.51 | 3.50 | 21.93 | 32.80 |
| Average Return |
|
|
|
| 26.68 |
| Sensex | 21079 | 17540.29 |
|
| 20.17 |
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Methodology
We started the process by taking the entire universe of equity-linked saving schemes. Post that, we applied different filters.
The first filter was the period 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 three time periods of three months, one year and three years respectively. 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 20 per cent to the three-month rank. The logic behind providing more weightage to long-term returns is to give more importance to those funds that have consistently performed well over the long term.
Finally, 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 fared well in the past, but are expected to perform better in these trying times as well.
Axis Long Term Equity Fund
NAV Rs 12.59 ..................................................................AS ON 20/12/2013
AUM Rs 146.5 CRORE ................................................... AS ON 30/09/2013
| Top Five Holdings |
| Company | % of Corpus (30/11/2013) |
| Larsen & Toubro | 6.83 |
| HDFC Bank | 6.47 |
| Kotak Mahindra Bank | 6.19 |
| HDFC | 5.8 |
| Tata Consultancy Services | 5.59 |
Axis Long Term Equity Fund has the distinction of being the only fund in its category that has generated double-digit returns in the past three years. Even over the last one-year and two-year periods, the fund has managed to top its peers in terms of returns. It has generated returns of 10.68 per cent and 15.31 per cent for its investors in the last three-year and one-year periods respectively. It must be noted here that its risk-adjusted returns, as represented by the Sharpe ratio, is the best among the funds in its category.
The investment style of the fund is growth-oriented, with a diversified market cap. While it has the BSE 200 as it benchmark, the fund also has the mandate to invest in stocks beyond its benchmark index. The fund currently holds 37 stocks in its portfolio, and at the end of November 2013, its top 10 stocks constitutes 52 per cent of the total holding. A sector representation analysis of the latest portfolio reveals that the fund is underweight on technology, neutral on financials and overweight on healthcare stocks.
Top Three Sectors as
On 30/11/2013 |
| Financial | 23.89% |
| Technology | 13.11% |
| Healthcare | 12.08% |
One of the reasons for the fund’s outperformance is its reliance on Large-Cap stocks, which constitute almost 54 per cent of its total assets at the end of November 30, 2013. (In the past few years, Large-Cap stocks have beaten Mid- and Small-Cap stocks.) The top 10 stocks of the fund have largely remained the same in the last one year.
However, the performance of fund may be impacted going ahead if the fund manager is not able to churn its portfolio and give more weightage to Mid- and Small-Cap stocks. From the performance of Mid- and Small-Cap stocks in the past few months, wherein they have outperformed the frontline indices, we feel that they may pick up after underperforming the Large-Caps in 2013. That the fund needs to widen its focus to Mid- and Small-Caps becomes evident from its performance in the last one and three- month periods, wherein it has slipped to number 24 and 10 respectively out of 73 funds. We advise risk-averse investors to take exposure to this fund.
Trailing Returns As on 20/12/2013 | Fund (%) | Category (%) |
| 3-Year | 10.68 | 2.49 |
| 1-Year | 15.31 | 5.37 |
| 6-Month | 17.31 | 12.86 |
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Franklin India Taxshield
NAV Rs 31.20 ...................................................................AS ON 20/12/2013
AUM Rs 900.10 CRORE................................................. AS ON 30/09/2013
| Top Five Holdings |
| Company | % of Corpus (30/11/2013) |
| Infosys | 8 |
| Bharti Airtel | 7.37 |
| ICICI Bank | 5.47 |
| Reliance Industries | 5.07 |
| HDFC Bank | 4.81 |
Franklin India Taxshield has been able to maintain a commendable performance since its inception in the year 1999. In the last three years, the fund has been able to generate returns of 5.68 per cent against 2.49 per cent given by its category. Anand Radhakrishnan, Head of Equities & Portfolio Manager, Franklin Templeton Investments – India shares, “Though our investment style has an inherent growth bias, we are not limited by external style classifications. A fair comment on our investment style would be to describe it as bottom-up, research based, and a dynamic ‘blend’ of growth and value”.
With 51 stocks in its portfolio, the fund has a corpus of Rs 900 crore. The top 10 stocks make up 46.67 per cent of the portfolio. In the past too, the fund has not hesitated to pick up Mid- and Small-Cap ideas where they have found favourable long-term potential. The simple idea is to have an optimum mix of Large-, Mid- and Small-Cap stocks that can help the fund deliver superior risk-adjusted returns across market cycles.
Top Three Sectors As on 30/11/2013 |
| Financial | 25.71% |
| Healthcare | 13.08% |
| Energy | 12.81% |
The top three sectors, viz. financials, healthcare and energy, constitute 51.6 per cent of its portfolio. The performance of the fund has also been in line with the category in the last one year, with the scheme generating a return of 5.36 per cent as against 5.37 per cent reported by the category. In the long run, though, the fund has outrun the category returns by miles. For the last three-year period, we find that the fund has generated a return of 5.68 per cent, 319 basis points higher than that of the category. This makes it clear that this scheme is for long-term investment, and our suggestion to investors would be to make it a core part of your ELSS portfolio.
Trailing Returns As on 20/12/2013 | Fund (%) | Category (%) |
| 3-Year | 5.68 | 2.49 |
| 1-Year | 6.34 | 5.37 |
| 6-Month | 10.94 | 12.86 |
ICICI Prudential Tax Plan
NAV Rs 19.56 ...................................................................AS ON 20/12/2013
AUM Rs 1363.50 CRORE............................................... AS ON 30/09/2013
| Top Five Holdings |
| Company | % of Corpus (30/11/2013) |
| NMDC | 5.59 |
| Infosys | 5 |
| Tech Mahindra | 3.97 |
| ICICI Bank | 3.95 |
| Cairn India | 3.78 |
An investment of Rs 1000 per month starting December 2010 would have fetched you a return of Rs 43842 till December 20, 2013. These are the returns that one would have generated by investing in ICICI Prudential Tax Plan via an SIP of Rs 1000. Its expense ratio of 2.4 is the lowest among the five fund schemes that we are recommending. To compare on a point-to-point basis for the last one year, the scheme has generated a return of 7.75 per cent.
Naturally, the fund has been well-received by investors, and its corpus as at the end of Q2FY14 stands at Rs 1363.50 crore, the highest among our recommended schemes. Speaking about the investment philosophy on which this fund works, Chintan Haria, Fund Manager, ICICI Prudential AMC explains, “The strategy is simple, as we keep a close look at the valuations. Therefore, we do not keep an exposure to sectors which are trading at higher valuations. To quantify this statement, the exposure to the consumption sector for the past two years has been close to nil”.
The fund structure is such that it has run as a flexi-cap fund for the last five years, with 65 per cent exposure to Large-Cap and 30-35 per cent to Mid- and Small-Cap stocks. This approach to investing has provided it with the flexibility to move across market capitalisation depending on the market conditions.
The fund manager stays well invested in all market cycles, with cash holdings rarely exceeding 10 per cent. A diversified portfolio with a Large-Cap tilt has helped to bring about stability.
Top Three Sectors As on 30/11/2013 |
| Healthcare | 14.77% |
| Energy | 14.56% |
| Technology | 14.16% |
As far as the sectors are concerned, Haria shares, “I like sectors which will be beneficiary of a capex cycle uptick in India. I am positive on Industrial Capital Goods companies, ancillary companies which will benefit from a capex boom in India.
I also like the energy sector, as in the recent past a lot of developments have happened here and I expect that there will be a re-rating of the sector in the next one or two years”.
The fund has shown a strong performance in the past and we believe that it will be able to maintain this good run going forward too. Investors can look to invest in this fund with a longer-term perspective.
Trailing Returns As on 20/12/2013 | Fund (%) | Category (%) |
| 3-Year | 5.28 | 2.49 |
| 1-Year | 8.48 | 5.37 |
| 6-Month | 19.25 | 12.86 |
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IDFC Tax Advantage (ELSS) Fund
NAV Rs 14.70 ...................................................................AS ON 20/12/2013
AUM Rs 639.6 CRORE .................................................... AS ON 30/09/2013
| Top Five Holdings |
| Company | % of Corpus (30/11/2013) |
| Infosys | 5.35 |
| Tech Mahindra | 4.48 |
| Biocon | 4.42 |
| Larsen & Toubro | 4.41 |
| HDFC Bank | 4.16 |
IDFC Tax Advantage (ELSS) Fund did not have the best of starts that one would expect for a performer of its calibre. Launched in the year December 2008, the fund remained a laggard in its initial years and was ranked 26th among 32 ELSS schemes in the year 2009. In the same year, it underperformed both the frontline indices as well as its benchmark, despite giving returns of 70 per cent. In the following years, however, the situation changed and the fund became a leader. In the past three years, the fund has managed to beat the category and frontline indices across the three-month, six-month, one-year, two-year and three-year time frames.
Aniruddha Naha, Fund Manager, IDFC AMC, shares that the reason for such outperformance is “investing into good business across market capitalisation”. Naha further explained that, “Good businesses would be companies which have a successful track record, are either the leaders or consolidators in the business or are the most competent competitors. The fund doesn’t take any business risk but is ready to take valuation risk, while owning good businesses”.
The fund has a concentrated portfolio and currently holds 36 stocks. Despite its concentrated nature, no single company forms more than six per cent of the portfolio and the top 10 stocks form only 40.08 per cent of the total assets.
Top Three Sectors
As on 30/11/2013 |
| Financial | 16.4 |
| Technology | 15.67 |
| Healthcare | 14.72 |
The entire market, according to the fund manager, is divided broadly into three major segments, viz. consumption, investment and exports. The fund is currently neutral on the consumption space and underweight on the investment space, which also includes financers of the investment cycle, the banking and financial space. The export sector is the only place where the fund is overweight, and this is represented through the IT and pharmaceuticals sector. The top 10 sector holding reflects the fund’s view, as the financial sector has lower weightage and the healthcare sector has higher weightage compared to the benchmark.
Going forward, the fund is expected to continue its performance as exports remain one of the best performing sectors due to rupee depreciation as well as an improving international economic scenario, both beneficial for exports. Therefore, we advise investors with a low risk appetite to take exposure in the fund.
Trailing Returns As on 20/12/2013 | Fund (%) | Category (%) |
| 3-Year | 6.56 | 2.49 |
| 1-Year | 12.49 | 5.37 |
| 6-Month | 19.66 | 12.86 |
Religare Invesco Tax Plan
NAV Rs 14.21 ....................................................................AS ON 20/12/2013
AUM Rs 127.80 CRORE.................................................. AS ON 30/09/2013
| Top Five Holdings |
| Company | % of Corpus (30/11/2013) |
| Britannia Inds. | 6.58 |
| Tata Consultancy Services | 6.3 |
| HDFC Bank | 5.9 |
| HDFC | 5.52 |
| Maruti Suzuki India | 4.62 |
In the past one year, the fund has generated a return of 7.68 per cent and its expense ratio stands at 2.88 per cent. The corpus of the fund stands at Rs 128.84 crore as of Q2FY14. At present, the scheme has a concentrated, well-researched portfolio of around 49 stocks to avoid the prospect of over-diversification and reduction of investors’ returns.
On an average, the fund’s exposure to equity has remained to the tune of 94 per cent, 50 per cent of which has been allocated to Large-Cap stocks. The rest is with Mid- and Small-Cap stocks, with Mid-Caps having the dominant position in that portion.
The fund has proved its resilience in the market downturns of 2008 and 2011. It has impressive figures to show over the long term, as its annualised three-year returns of 5.31 per cent are close to twice the category returns of 2.49 per cent. It has always been part of the top two quartile and has been among the top performing funds in its category.
Top Three Sectors as on 30/11/2013 |
| Financial | 20.69% |
| Technology | 13.62% |
| Energy | 9.96% |
Maruti Suzuki India is one stock that the fund has in its portfolio since the inception, which has provided decent returns over the years. Britannia Industries is its single highest Mid-Cap holding of around 7.3 per cent. The top 10 stocks make up 45.93 per cent of its portfolio. The top three sectors, viz. financial, technology and energy, comprise 44.27 per cent of the total portfolio.
The fund has truly shown its potential and we believe that the fund managers Vetri Subramaniam and Vinay Paharia have surely proved their mettle. We advise investing in this scheme with a longer-term perspective through the SIP route rather than in lump sum.
Trailing Returns As on 20/12/2013 | Fund (%) | Category (%) |
| 3-Year | 5.31 | 2.49 |
| 1-Year | 8.66 | 5.37 |
| 6-Month | 12.16 | 12.86 |