Investors seeking the section 80C tax kick would do well to look at the track record of some equity-linked saving schemes (ELSS) in the market. Well-picked schemes have turned Rs1 lakh invested 10 years ago into at least Rs7 lakh now.
One, it is the only efficient, full-equity tax-saving vehicle. The New Pension System allows just 50% investment into equity, while unit-linked insurance plans (Ulips) are non-transparent, nonportable and mired in mis-selling.
Two, the three-year lock-in for ELSS is the shortest among comparable products. You get zero tax status on long-term capital gains and dividend.
What to buy?
Crowded with over 30 ELSSs, most of them dangling the dividend carrot, the ELSS market may get confusing for you. The only filter you should use is consistent performance. Don’t get attracted by dividends ever because, typically, ELSSs declare dividends around this time of the year.
Money Matters helps you decide by doing the numbers and background search. The six funds we shortlisted fall in two groups. Three of them are conservative equity funds having lower risk. The others carry slightly higher risk, but also have the potential for higher returns.
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Conservative funds: HDFC TaxSaver, Franklin India Taxshield and Fidelity Tax Advantage are conservative ELSS schemes and have given good returns. One of these can form the core of your ELSS portfolio with an investment up to Rs50,000.
Launched in June 1996, HDFC Taxsaver is one of the oldest open-ended tax-saving funds in the industry. Its more than 13 years old and still packs a punch.
Franklin India Taxshield has given steady returns across various time periods. The fund’s strategy to limit its mid-cap exposure to around 25%, its preference for large-cap stocks and a well-diversified portfolio ensures that the fund does well in falling markets.
Launched in March 2006, Fidelity doesn’t have a long history yet, but has managed consistent performance. It’s a diversified fund that invests in sectors and stocks across all market capitalizations. Fund manager Sandeep Kothari manages a portfolio of around 60 to 70 scrips, which could be a challenge going ahead as the fund’s size is already Rs1,130 crore.
This fund, typically, holds up to 10% of the portfolio in cash, according to mutual fund tracker Morningstar India’s data. It has a high exposure to the financial services sector—about 27% at present. This is because the fund manager feels that banks still have a wide market to penetrate. Its investments in lubricant maker Castrol India Ltd and agrochemical company Rallis India Ltd in early 2009 paid off well, along with its earlier investment in home appliances manufacturer Whirlpool of India Ltd.
Return-kicker ELSS funds: The three funds under this category come with more risk but do have the potential of higher return. Put up to Rs50,000 in one of the three: Sundaram BNP Paribas Taxsaver, Religare Tax Plan and Birla Sunlife Tax Relief 96.
Sundaram Taxsaver proved its critics wrong when it managed to lose just 48% against the category average of minus 55% during the 2008 crash. Despite being a fund that was geared to a rising market, its agile management and high cash levels (22% between July and December 2008) helped it float in choppy waters. It churns the portfolio hard. For example, its investment in the software sector swung from 2% of its portfolio in February to 9% in March and then back to 5% in May. Its exposure to the financial services sector was 20% in May 2008, went down to 7% in June and was back up to 28% in October the same year.
Its investment in Tata Motors Ltd, Mahindra and Mahindra Ltd and Hero Honda Motors Ltd during falling markets of 2008 helped the fund even during the 2009 market rise. However, its investment in Satyam Computer Services Ltd, hit it in the first quarter of 2009. It seems to be on a recovery path now; in the past six months, it returned 40% against the category average of 37%. At present, the fund has high holdings in industrial and energy sectors as fund manager Satish Ramanathan feels they would bode well in a rising economy.
Birla Sun Life Tax Relief had a disappointing 2008 because its investment calls in the capital goods sector and stocks such as United Breweries Ltd and ICICI Bank Ltd went wrong. But it has bounced back. Between April and December, it returned 126%. Like Sundaram, this one too invested in the auto sector (Maruti Suzuki India Ltd) and stuck to it despite the fall in 2008. Its investments in engine maker Cummins India Ltd and Honeywell Automation India Ltd also benefited the fund. It has reduced its exposure to the consumer goods sector in 2009 on account of increasing its investment in more aggressive sectors, such as information technology and industry materials. The fund is well-diversified across sectors and has a good mix of large- and mid-cap stocks.
Though Religare Tax Plan is a relatively new kid on the block, having just completed three years, we feel it has a good future. With a corpus of just over Rs100 crore and fund manager Vetri Subramaniam’s good track record, the fund did well in both the falling markets of 2008 and rising markets of 2009, despite having around 56% investments in mid- and small-sized companies. If the fund manager plays his cards well, the fund is set for a good run ahead. If you must invest in Religare, we suggest minimal exposure due to the presence of other long-term funds. But do keep it on your watch list.
Illustration by Jayachandran; graphic by Ahmed Raza Khan / Mint