It’s that time of the year when you should be thinking of completing your tax planning exercise, with the 31 March deadline looming. And if you have not invested under section 80C, get your act together.
Income tax office at Vaishli in New Delhi. Sunil Saxena / Hindustan Times
You could look at the equity market. The good thing about an equity linked savings scheme (ELSS) is that it has the lowest lock-in period as compared with the other options under section 80C. The minimum period of three years ensures that you put in money that you won’t need for a while. The other option is to start at a minimum of five years.
The ELSS category has delivered annualized returns of at least 12% over the past five years. This is much higher than the returns you will get on the other instruments under section 80C, which average 8-9%. The tax implications are also alluring. You get a tax benefit when you invest in an ELSS scheme, dividends are tax-free and when you sell the units, you pay no tax. This makes it score higher than bank fixed deposits and the national savings certificate (NSC) scheme. In terms of returns and lock-in, it scores over the public provident fund (PPF) too. From among 36 funds, we bring you three of the best:
Franklin India Taxshield
Assets: Rs376.72 cr
Launched in 2000, it made its mark on the returns tables in the first year itself. When the entire category fell by 23.74% in 2000, this fund delivered 2.11%, thanks to huge cash allocations.
During the bearish phases of 2001 and 2002, it fell less than the category average. In 2008, it once again managed to protect the downside and in the third quarter, actually delivered 0.23% when the category average was -5.39%. The cash allocation was not too aggressive and averaged at just 6% during this quarter while the large-cap allocation averaged at 76%. While both these factors helped to some extent, it was the sector allocations that played the important role. It maintained a higher-than-average allocation to financials and consumer durables, a lower allocation to energy and exited from metals altogether. The fund manager does not chase top performing sectors if he does not believe in them. But this could also cause him to miss out on rallies.
Also See Returns (PDF)
Despite a few misses, the fund has done well for itself. Its all-cap strategy has held it in good stead and over the past five years has delivered an annualized return of 13.77% (as of 6 February). While the top 10 holdings account for almost half the portfolio, the risk is mitigated to some extent by a large-cap tilt. The fund manager also takes small exposures in many stocks, with some having an exposure of 1% or less.
Though it has the unique ability to always protect the downside, it is not the most exciting offering. During bull runs, it has been a middle-of-the-road performer but over the long term, it beats the category average.
It is basically a safe and sound offering.
Assets: Rs2,407.80 cr
While its critics say the fund slowed last year, we think it is still a worthy pick. Launched in 1993 as a close-ended fund, it was converted into an open-ended offering in 1999.
This fund’s performance can be broken up into two phases: pre- and post-2003. Between 1996 and 2002, it underperformed the category every year, barring 1999, when it delivered a whopping 330% (category: 209%). Since its excellent performance in 2003, it remained on top in its category till 2006. However, in 2007, it was not even in the top two quartiles. In 2008, it contained its losses, shedding 55% compared to the category’s 59%.
Also See Returns (PDF)
The fund manager tends to tilt towards growth stocks but sticks largely to a buy-and-hold strategy. It has profited hugely from its long-term holdings such as Shree Cements, Thermax and Praj Industries. But that does not mean the fund manager overlooks opportunistic bets. Recently, the fund has undergone a transformation into a more conservative offering. Most apparent has been the increased allocation to cash and debt since 2006. While the mid- and small-cap allocation decreased, it took on a large-cap orientation towards the middle of 2007. Simultaneously, the fund also broadened its portfolio. The number of stocks averaged 18 (2001) and slowly inched to 26 (2005). But it was from 2006 on that it really changed—it averaged 51 before rising to 77 by 2007.
While many may frown at this conservative tilt, it makes it a more stable and safer offering. And it will now not only appeal to aggressive investors. Even conservative investors can consider it.
A worthy choice
Sundaram BNP Paribas Taxsaver
Assets: Rs498.94 cr
This fund’s adaptability is appealing. Though there have been times when it did not shine and delivered average returns, its approach has translated into a competitive long-term record. Even more favourable is that it has often displayed the ability to protect the downside.
Typical of this fund’s style is flexibility in every aspect. Its mandate allows it to take on any style it chooses, in the form of a multi-cap approach or a thematic one. If the fund manager sees an opportunity, he is quick to capitalize on it, be it in stocks or sectors. In 2007, for instance, the metals allocation jumped from 8.86% (August) to 20.87% in just two months, a move that paid off handsomely since BSE Metals delivered a phenomenal 73% during this period. Five months down the road, sensing a downturn, it was down to 4%. Similarly, after increasing the allocation to financial services to nearly 21% (December 2007), the fund manager reduced it to 4.93% in June and seven months later, it stood at 21.51%.
The same treatment is meted out to stocks, with a number of them making short opportunistic appearances in the portfolio. Out of the 327 stocks it has invested in so far, 126 have appeared for less than six months. But rarely does the fund manager take an exposure of more than 5% to a single stock. In fact, this actively managed fund has the highest Sharpe Ratio amongst the tax planning funds, meaning it generates higher returns for every unit of risk taken.
With a multi-cap strategy, diversified portfolio and long-term record, it is suitable for all kinds of investors.
2009 has started on a bright note for the mutual fund industry, with the assets under management (AUM) of the industry rising by 9.43%, witnessing an overall increase of Rs39,793 crore. The total AUM of the industry stood at Rs4.62 trillion in January as against the December AUM of Rs4.21 trillion. This is the highest jump since October 2007, when assets had risen by 15%. Of the 35 functional fund houses, 22 witnessed an upsurge in their AUM. Reliance MF and HDFC MF continued to be the biggest fund houses with an AUM of Rs76,168.48 crore and Rs51,420.73 crore respectively.
In a bid to woo the investor this year, a number of tax-saving funds are adding new bait to their schemes: an insurance cover. At present, there are five such tax-saving funds: HSBC Tax Saver Equity Fund, DWS Tax Saving Fund, Birla Sun Life Tax Relief ’96 Fund, Reliance Tax Saver Fund and Baroda Pioneer ELSS 96. DWS Tax Saving Fund and Reliance Tax Saver provide a life insurance cover, Birla Sun Life Tax Relief Fund and HSBC Tax Saver Fund provide a critical illness cover and Baroda Pioneer Equity Linked Saving Scheme provides an accidental death insurance cover. But don’t opt for a fund just because of the insurance cover. Take a good look at past performance too. And on that front, none of them seem to be all that impressive.
Benchmark Mutual Fund has launched a shariah fund, the first of its kind in India. Close on its heels is Taurus Mutual Fund, which plans to launch a shariah-compliant equity fund in April. While both funds will be shariah-compliant and open-ended, the similarities end there. The fundamental difference is that Benchmark Mutual Fund’s product is an exchange traded fund (ETF) while the other is a diversified equity fund that will directly invest in stocks. In the case of the fund from Taurus Mutual Fund, the elimination of stocks in the very first round would be those that are not shariah-compliant. For instance, companies in the financial sector (including insurance players), businesses involving alcohol and pork (manufacturing, distributing, marketing or selling) and companies involved in gambling or nightclub activities will be eliminated.
If there was one asset class that stood out in 2008, it was gold. This is certainly great news for investors who had invested in gold ETFs at the start of the year. That category of funds turned in 25% when the Sensex has lost 54%. But one fund that stood out was DSP BlackRock World Gold Fund, which delivered -19%, a fairly good performance when compared with other equity funds.
Our advice to investors is to tread cautiously if you are planning substantial exposure to gold. And, ensure you decide whether the exposure should be via an ETF or a gold fund.