MF Query Board
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I am looking for a tax saving fund and have shortlisted Canara Robeco Equity Tax Saver Fund. Is this fund good? If not, can you suggest which ELSS to invest in? - Himanshu Bhatt
First of all, when it comes to tax saving, it is important to have a combination of both debt and equity. For the debt part you can consider investing in Public Provident Fund (PPF) and for equity you can consider Equity Linked Saving Scheme (ELSS). Now the question is why should you split your investment between debt and equity for tax saving? The rationale behind the same is that investing in both will ensure better tax-adjusted returns as well as risk is contained to some extent. PPF carries an Exempt-Exempt-Exempt (EEE) tax status. Therefore, it is a tax-free instrument. When it comes to ELSS, long-term capital gains tax is applicable which means that any gain above ₹ 1 lakh would be taxed at the rate of 10 per cent.
Coming back to your question, in order to pick the best fund on quantitative basis, we run it through our proprietary tests wherein we look at its long-term performance, its performance consistency, ability to protect downside risk and its near-term performance. So, in case of Canara Robeco Equity Tax Saver Fund, in terms of long-term performance and its performance consistency, it is just okay and there is nothing spectacular about it. There are many such funds that did better than Canara Robeco Equity Tax Saver Fund in terms of long-term performance and performance consistency.
However, it scores pretty well in terms of downside risk and near-term performance. Overall, the fund is just fine and if your risk profile is moderate then you can consider investing in it. Otherwise, this fund can be skipped. In place of this we would suggest you to invest in either DSP Tax Saver Fund or Axis Long-Term Equity Fund. DSP Tax Saver Fund does well in all the tests we have put it through. Even Axis Long-Term Equity Fund does well; it is only behind the DSP Tax Saver Fund in terms of near-term performance.
In terms of returns, in the recent times Canara Robeco Equity Tax Saver Fund has done better than the other two. However, this outperformance was majorly during the post lockdown period. However, in the long-term performance, Axis Long Term Equity and DSP Tax Saver Fund have done better. In terms of risk, DSP Tax Saver Fund carries the higher risk. Therefore, it should be the choice of investors with aggressive risk profile. For moderate risk profile Canara Robeco Equity Tax Saver Fund is fine and for conservative risk profile the Axis Long Term Equity Fund is suitable.
The best time to buy equity mutual fund is when the markets correct. Similarly, for debt mutual funds which is the best time to invest? - Ravindra Juneja
While investing in debt funds, you really don’t need to time your investment. You can simply align your financial goals and remain invested. However, make sure that you choose the appropriate kind of fund depending on your investment horizon. Having said that, you need to ensure the chosen fund is complementing your risk profile and investment horizon.
Although, your first argument where you said that you should buy equity funds when the market corrects is wonderful to the ears, it is quite difficult to implement. This is because it is very difficult to find the bottom on a consistent basis even for experts having years of experience in the stock market. Therefore, don’t try bottom fishing and rather have a disciplined approach towards investing. Having a disciplined approach usually sets your mind free from thinking whether the market is up or down. You will buy in both the scenarios.
And in debt funds it is even difficult to understand where it will head. While investing in debt funds there are two major strategies: one is duration and other is accrual. In the duration strategy, your main aim is to play on the interest rate cycle which is very difficult to predict. Accrual is a very crude strategy wherein you just buy and hold till maturity and earn interest. Hence, the accrual strategy virtually has no interest rate risk. Apart from this, you also need to look at the credit worthiness. When the economy is moving in the recessionary phase, investing in long duration funds with minimal to no credit risk makes more sense. When the economy begins to revive and when the credit cycle too reverses, investing in credit risk funds with shorter duration might prove to be a wiser option.
I am planning for my child’s education. As such, what would be a good investment strategy for the same? Is it wise to invest in children’s plans offered by mutual funds? - Rachit Vora
We strongly advise you to avoid falling prey to such schemes’ marketing tactics. These ideas appear to be pretty appealing and they will attract any parent who, like you, wishes to provide children with a better education and life. Mutual funds and life insurance companies are notorious for playing the emotional game. As a result, investing in them is pointless. However, the trailing performance of child-focused mutual funds is shown below to give you an idea. As can be seen, the performance is nearly identical to the S & P BSE 500 Price Returns Index (PRI).
This indicates that these funds will struggle to outperform the S & P BSE 500 Exchange Traded Funds (ETFs) or index funds that track the S & P BSE 500 Total Returns Index (TRI) in the long run. Furthermore, these funds’ expense ratios would be greater than index funds and ETFs. That said, the question remains as to what type of investment is best for your child’s education. If your child is still young, it would be a good idea to put more money into equity funds. And if you are a seasoned investor, go for the most aggressive exposure you can. Say you have saved for 12 to 13 years for your child’s education and your child is expected to start college soon.
In that case we would recommend you to start planning three years ahead of time. This means that for three years ahead of time take out the requisite funds and park it in debt funds and then a year later do the same for the second year, and so on. Doing so will set you free from worrying about the situation of the market. Mutual fund companies’ child education plans are ineffective because they impose unneeded restrictions. They meet the needs of a novice investor as they believe that if it’s a child’s fund then they are investing for their child, which makes sense. However, if you are capable of selecting a decent fund and are sufficiently disciplined, any fund or portfolio of funds can be a child’s plan.
What are the benefits of investing in index funds? Please suggest some good index funds. - Arijit Paul
Investing in index funds has a number of advantages. We have included a few of the most notable ones below:
1) Index funds may yield substantial returns over a longer time horizon if one has the patience and discipline to stick with them. The Nifty 50 index, for example, began in 1995 and has returned 11 times since then. That is, even an index fund based on the Nifty or Sensex would have produced significant returns during the previous several years.
2) In the case of index funds, risks become more limited and clearer. The Nifty and Sensex are already extensively followed, and having a macro view based on past data is considerably easier than picking individual securities. The universe can now be tracked and estimated more easily.
3) The most significant benefit of index funds is that they far overcome human bias. The issue with some broad equity funds is the high level of discretion granted to fund managers. As a result, the fund manager’s conditioning, prejudices and prior experiences influence the fund’s investing strategy. In the case of index funds, the fund manager is more concerned with just monitoring an index. To begin, the fund manager will construct a portfolio of companies that perfectly mirrors the index (Nifty or Sensex) in terms of percentage. The fund manager is not required to utilise his or her discretion in stock selection.
4) Index fund expenses are substantially lower than those of actively managed diversified equities funds. Although this difference appears to be insignificant in the short term, it might have a significant influence on your wealth in the long run.
5) In India, just 20 per cent of actively managed large-cap funds outperform their benchmark index. As a result, a preference shift from large-cap funds to index funds is required.
The list of top index funds is shown below:
