Make allocation to ELSS funds based on tax saving requirement

Analyse your tax-saving requirement as per section 80C of the Income-tax Act, 1961, and take a call on the allocation level


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I am 24 years old and planning to make an 80:20 allocation between equity and debt to build my mutual fund (MF) portfolio. By the end of the year, I want to have a portfolio with 34% in equity-linked savings schemes (ELSS), 46% in equity and 20% in debt. For ELSS, I am investing through systematic investment plans (SIP) in Axis Long Term Equity Fund (G) and DSP BlackRock Tax Saver Fund (G). For the equity MF category, I am planning to choose SBI BlueChip (large-cap) and ICICI Prudential Value Discovery Fund (multi-cap). Birla Sun Life Frontline Equity has the same standard deviation as that of SBI BlueChip, but has a lower mean return, Sharpe ratio and alpha return. I am still confused between SBI BlueChip and Birla Sun Life. Please comment on my choices and also suggest a debt fund suitable for a holding period 2-5 years.

-Jyothi

It is commendable that you are starting on a disciplined systematic investment strategy at such a young age. The application of thought that you have put into your portfolio design (starting with asset allocation, to fund categories, to fund selection) is also noteworthy for prudence. To comment on your portfolio, let me start by stating that the asset allocation that you have is quite aggressive.

Given your age and long-term investment horizon, it is a good plan as long as you can resolve to stay committed through the ebbs and flows of the market during the course of your investment. Regarding the fund categories you have chosen in equity, 34% allocation to ELSS is a little on the high side. Allocation to such funds should be decided based on tax saving needs in a given year, and not as a general portfolio design decision. Please analyse your tax-saving requirement as per section 80C of the Income-tax Act, 1961, and take a call on the allocation level.

Coming to your choice of funds, Axis Long Term Equity is a good ELSS option. You can go for ICICI Prudential Long Term Equity fund if you need a second fund in this category. Between SBI BlueChip and Birla Sun Life Frontline Equity fund, while they are both good funds, the former has had, historically, a more aggressive portfolio than the latter. The SBI fund, over the past several quarters, has had 25% invested in mid-caps as opposed to 15% for the Birla Sun Life fund. That would also explain its outperformance in the recent quarters when mid-caps have shined in the market. But the Birla Sun Life fund has had a better record of containing downsides in a poor market, making it a more conservative choice. So, between the two, you can choose based on how aggressive you want your fund to be. Else you could split the difference and have both.

For the debt allocation, you could go with income funds or short-term funds such as UTI Short Term fund and Franklin India Short Term fund. You can also refer to Mint’s curated list of 50 funds: http://bit.ly/28OPj0o .

Queries and views at mintmoney@livemint.com

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