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Recommended Taxsaver Funds
December 30, 2011

In this article, we highlight top 5 recommended ELSS based on our in-house research methodology


Author : Raju Singh



Untitled Document
 

As per Section 80C of Income Tax Act 1961, individuals are allowed to invest up to Rs. 100,000 in tax saving instruments, which will be deductible from their Gross Total Income. Investing in tax saving mutual funds or Equity Linked Saving Schemes (ELSS) offers not only tax benefits but also an opportunity to create wealth.

Equity Linked Saving Schemes are equity-oriented mutual funds with a lock-in period of 3 years. Dividends received from ELSS funds are also tax exempt. The low lock-in period and the potential to generate market-linked returns makes them a tax saving favourite. In continuation to our earlier article on Equity Linked Saving Schemes (see “Save Tax with ELSS Mutual Funds”); we highlight our recommended tax saving funds.

Table 1:  Recommended ELSS Funds

Scheme Name 6 Months 1 year 2 Years 3 Years 5 Years 10 Years Since Inception
Canara Robeco Equity Tax Saver Fund (D) -7.52 -12.27 6.46 33.02 12.53   20.72 13.97
Fidelity Tax Advantage Fund (G) -9.89 -15.53 4.75 28.12 9.84  NA 12.24
Franklin India Taxshield Fund (G) -6.27 -9.47 6.59 27.15 9.15 24.66 26.46
HDFC TaxSaver Fund (G) -11.35 -17.90 3.15 30.41 6.67  28.34 29.35
Religare Tax Plan (G) -8.22 -13.66 4.77 28.07  NA  NA 9.82
Return less than 1 year are absolute and greater than 1 year are annualised . Source: ACE MF, iFAST Compilations. Data as on 30 November 2011

Canara Robeco Equity Tax Saver Fund

Canara Robeco Equity Tax Saver Fund has a track record of more than a decade and half. It was launched in March 1993 and is managed by Mr. Soumendara Nath Lahiri. On a 5-yr basis as on 30 November 2011, this fund has shown the best performance in the ELSS category.

Fund Size: Rs. 302.14 cr. (as on 31/10/2011) Benchmark: BSE 100

Investment Strategy: The fund follows growth style of investing with a blended portfolio of large, mid and small cap stocks. The fund manager keenly plays on India’s growth story. It holds stocks in the range of 50-57 with a bias to large cap stocks. The fund takes market capitalisation calls looking at the market conditions. But it generally limits the allocation to small cap stocks between 10 to 15%.  The previous fund manager, Mr. Anand Shah, had transformed the fund from a concentrated portfolio to a more diversified one in September 2008. The fund’s top 10 stocks and top 5 sectors constitute 35.97% and 47.71% of the portfolio respectively.

Performance: The early years of the fund were not remarkable. It had mediocre performance till 2007. From 2008, the fund has given continuous outperformance against the ELSS category average and its benchmark. It has outperformed ELSS category’s average and its benchmark on 6 mths, 1-yr, 3-yr and 5-yr periods as on 30 November 2011. On a 5-yr basis as on 30 November 2011, it has shown the best performance in the ELSS category.

Based on the our tests, the fund has ranked amongst the top 2 funds on most parameters like Sharpe Ratio, Jenson Alpha, Sortino Ratio and Treynor Ratio in a peer group of 35 funds considered.

# Higher the ratio value better is the fund.

Fidelity Tax Advantage Fund

Fidelity Tax Advantage Fund, a consistent performer in ELSS category, was launched in Jan 2006 and is managed by Mr. Sandeep Kothari. It has shown consistent performance since inception, outperforming the category average in bull and bear markets.

Fund Size: Rs. 1202.70 cr. (as on 31/10/2011) Benchmark: BSE 200

Investment Strategy: The Fidelity Tax Advantage Fund has a ‘go anywhere approach’ which means it does not have bias to market capitalisation, sectors and themes, even though it allocates at least 65 – 70% of the portfolio to large cap stocks. The fund focuses on bottom-up stock picking and tries to mitigate stock level risk by a diversified portfolio with no major exposure to individual stock. The fund manager plays with market capitalisation to better manage the downside risk. That helped the fund report the best downside protection in ELSS category during the market slump of 2008. The fund manager does not invest in momentum stocks even if the fund underperforms in short term. He looks for good fundamentals and holds the stocks for long term. In fact, around 15 stocks in the portfolio have been held since the fund’s inception.

Performance: The fund has pretty consistent performance since inception. It has continuously outperformed the ELSS category’s average in bull and bear markets. The large cap bias of the fund gives it stability but limits the upside potential. In market slump of 2008, ELSS category’s average and BSE 200 was down by 55.91% and 57.39% respectively but Fidelity Tax Advantage outperformed by reporting negative returns of 49.86% for the same period. However, in the subsequent market rally after 9 March 2009, while it has managed to outperform the ELSS category’s average and benchmark by decent margin, it has lagged individual top performing funds in the category.

Based on our tests, the fund ranks amongst the top quartile funds on most of the parameters like Sharpe Ratio, Jenson Alpha, Sortino Ratio and Treynor Ratio in a peer group of 35 funds considered.

Franklin India Taxshield Fund

Franklin India Taxshield Fund was launched in Apr 1999 and has a history of more than a decade. It is managed by Mr. Anand Radhakrishanan since April 2007. The fund has given CAGR of 26.47% as on 30 November 2011.

Fund Size: Rs. 775.15 cr. (as on 30/11/2011) Benchmark: S&P CNX 500

Investment Strategy: Franklin India Taxshield Fund invests across market capitalisation and sectors but offers a portfolio with major exposure to large cap stocks. Even in the rally after Mar 2009, the fund had exposure of more than 70% large cap stocks. In addition, exposure to small cap stocks has never gone above 10% since inception. The fund invests in a well-diversified portfolio of 50 to 55 stocks with attractive valuations via bottom up stock picking and majority of the stocks stay in the portfolio for long term. Financials, Information Technology and Telecom are amongst the top sector holdings for the fund since December 2010.

Performance: The fund has a very good long term track record. Since inception, it has a CAGR return of 26.47% p.a as of 30 November 2011. The positive part of this fund is that it never tries to chase the market. So in market rallies, it stays as an above average performer but protects from the downside very well and this has paid off well for investors in the long term. It has beaten ELSS category average and its benchmark on 6 mths, 1-yr, 3-yr and 5-yr periods as on 30 November 2011. This is a suitable candidate for investors who prefer a fund with a more defensive positioning.

Based on our tests, the fund ranks amongst the top quartile funds on most of the parameters like Sharpe Ratio, Jenson Alpha, Sortino Ratio and Treynor Ratio in a peer group of 35 funds considered.

HDFC Taxsaver Fund

HDFC Taxsaver Fund (HTF) is one of the oldest schemes in ELSS category, with a track record of a decade and a half. Mr. Vinay R. Kulkarni is the fund manager since November 2006. This fund has consistently outperformed its peer group, and has also outperformed its benchmark almost every year since inception.

Fund Size: Rs. 3032.10 cr. (as on 30/09/2011) Benchmark: S&P CNX 500

Investment Strategy: The fund has leeway to invest across market capitalisation and the fund manager takes active calls on it by looking at future market outlook. The small cap allocation was close to 2% till November 2008 and fund manager increased it to 11.6% from then until July 2009 to take advantage of the market rally of 2009. The fund has a mandate to invest up to 20% of the portfolio in money market instruments but it stays almost fully invested in equity currently. The HDFC Fund house does not take cash calls in general. It currently holds approximately 55 stocks, a broader diversification when compared against 35 – 38 stocks it held previously till 2007. The increase in corpus size may be the reason for increase in number of stocks. This is amongst the few funds that had not invested in Reliance Industries from November 2009 to March 2011.

Performance: This is one of the few funds that have been consistently outperforming its peer group. It has managed to stay within the top quartile of its peer group since inception. Apart from 2 or 3 instances, HTF has managed to outperform its benchmark on a yearly basis since inception. It has given 10 yrs returns of CAGR 28.33% against 18.40% and 21.42% by CNX 500 and the ELSS category average respectively. Even on 1 yr, 3 yr and 5 yr bases it has outperformed the benchmark and ELSS category average by good margins.

Based on our tests, the fund ranks amongst the top 3 funds on most of the parameters like Sharpe Ratio, Jenson Alpha, Sortino Ratio and Treynor Ratio in a peer group of 35 funds considered.

Religare Tax Plan

Religare Tax Plan (RTP), newest fund in our recommendation, was launched in December 2006. It is managed by Mr. Vetri Subramaniam, and has shown a favourable performance in a short span of time.

Fund Size: Rs. 108.14 cr. (as on 30/11/2011) Benchmark: BSE 100

Investment Strategy: This one of the aggressive offering in the category. It invests approximately 30 – 40% in midcap and 5 – 15% in small cap stocks. Even though RTP had exposure to mid and small cap stocks in the range of 35 – 50% in 2008, it had fared well by protecting downside better than the ELSS category’s average and its benchmark.  It holds stocks in the range of 45 – 55 which has increased from 25 – 30 stocks in 2007. The fund has a high turnover ratio as the fund manager makes frequent changes to his active calls. It had exposure to public sector banks of approximately 7% in February 2011 and reduced it to close to 3% by September 11. Same way, the exposure to private sector bank was close to 9.9% in February 2011 which was increased to 13.4% by September 2011.

Performance: The fund has performed favourably among the ELSS peer group within a short span of time and has performed well in bull and bear markets. During the market slump of 2008, it outperformed the ELSS category average and BSE 100 by approximately 5.0% and 5.4% respectively. Even during the market rallies of 2009, it has outperformed the ELSS category average and BSE 100 by approximately 7.6% and 4.5% respectively.

Based on our tests, the fund ranks amongst the top quartile funds on most of the parameters like Sharpe Ratio, Jenson Alpha, Sortino Ratio and Treynor Ratio in a peer group of 35 funds considered.

*Fund’s Statistical, Performance and Portfolio data are taken from ACE MF.

 


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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