Monday, November 28, 2011

November 2011

The mutual fund industry saw its asset base grow by 8.3% in October 2011, led by inflows from the corporate sector. According to the Association of Mutual Funds in India, assets under management stood at Rs 695,437 crore in October 2011 (Rs. 6.41 lakh crore at the end of September 2011). Of this, equity assets contributed 23% at Rs 1,61,532 crore, as against 24% of the industry’s assets in September 2011. The start of every quarter sees inflows into the industry as money that moves out as advance tax payments finds its way back into the system. Liquid/money market funds get a bulk of this investment. The total AUM under liquid/money market funds increased from Rs 1.28 lakh crore to Rs 1.62 lakh crore in October 2011, an increase of 26.46%. Gold ETFs were the next big gainers in October 2011 with the total AUM moving from Rs 8,173 crore to Rs 9,090 crore. Equity schemes have increased in AUM by 4.3% from Rs 1.54 lakh crore in September 2011 to Rs 1.61 lakh crore in October 2011. After collecting good inflows of Rs. 1,401 crore in September 2011, equity funds mopped up just Rs. 181 crore in October 2011. Overall inflow during the month was Rs 41,287 crore, which pushed the flows so far in 2011-12 to Rs 96,566 crore, against net outflows of Rs 6,194 crore during the previous corresponding period.

Equity mutual funds lost another six lakh folios in the first half of this fiscal. From 3.92 crore folios as at end March 2010, the total number of equity folios came down to 3.86 crore folios. However, the debt folios have seen an increase of 3.8 lakh or nine per cent, in folios during the same period. This fiscal has seen a lot of consolidation of schemes which has probably led to a decrease in the number of folios in the equity schemes. Moreover, there is now an overall acceptance of debt as an asset class. The number of SIP folios in the industry has seen a steady rise. There are about 75 lakh SIP folios in the industry and they bring in close to Rs 1,200 crore a month. However, the creation of SIP folios does not amount to an increase in the total number of folios.

The total number of folios in the industry is 4.71 crore, down by 62,413 folios from 4.72 crore as at end March 2011. However, in the last one year period, the number of folios has risen from 4.69 crore, as at end September 2010 to 4.71 crore as at end September 2011. According to data available with the Securities and Exchange Board of India, 61,000 equity folios were closed during October 2011.

In an interesting turn of events, the two leaders in the mutual fund sector have swapped positions. For four-and-a-half years, there was a single market leader in assets, Reliance Mutual Fund. In the quarter ended September 2011, HDFC Mutual Fund took that slot. The latter, however, has yielded the slot of the most profitable asset management company to Reliance Mutual Fund.

Foreign-owned fund houses lost market share (assets under management) by 11.4% in the last one year, when the industry AUM itself remained flat. According to data on the AMFI website, the cumulative AUM of the foreign fund houses stood at Rs 77,411 crore in September 2011, down by Rs 9,942 crore from Rs 87,353 crore in September 2010. The industry, during the same period, declined by about Rs 618 crore — from Rs 7.13 lakh crore to Rs 7.12 lakh crore. The Indian mutual fund houses, however, have fared better and added Rs 9,323 crore to their cumulative AUM. The AUM of the Indian fund houses moved from Rs 6.26 lakh crore to Rs 6.35 lakh crore during this period. Of the foreign fund houses, Bharti AXA saw the highest decline in AUM at 65.5% from Rs 510 crore to Rs 176 crore. JP Morgan Asset Management was next with a decline of about 44 % from Rs 8,447 crore to Rs 4,747 crore. Fund houses say that the decline is mainly due to the erosion in the value of the fund schemes themselves.

Piquant Parade

Parag Parikh Financial Advisory Services (PPFAS), Bank of India, and Bajaj FinServ Ltd. have announced their plans to enter the Indian mutual fund industry. While PPFAS is one of India’s oldest portfolio management services firms, Bank of India is a public sector bank which was in the mutual fund business in the 1990s, and Bajaj FinServ is the financial services firm of the Bajaj Group. Already two asset management companies (AMCs), India Infoline and Indiabulls have launched their operations recently.

A leadership vacuum at UTI Asset Management is taking a toll on the health of India's oldest mutual fund, dealing a setback to the Asian growth ambitions of its joint venture partner, US money manager T Rowe Price Group. The US-based asset manager, which holds 26% in the fund house, has been protesting at the appointment of an IAS officer without enough fund management experience as the company’s chairman. UTI had been headless for nine months since the last incumbent, U K Sinha, quit to take over as chairman of the Securities and Exchange Board of India. A similar delay happened after M Damodaran left to join IDBI Bank.

UTI Mutual Fund flagged off its second UTI Knowledge Caravan from Mumbai as part of its Investor Education Initiative called “Swatantra”. The Investor Education Initiative is in partnership with Ministry of Corporate Affairs, Government of India. During its journey, the caravan will cover more than 14000 kms in about 260 days. As a part of this initiative four UTI Knowledge Caravans will travel through the length and breadth of the country for spreading financial literacy. The first caravan was flagged off on October 31, 2011 from Delhi. UTI Mutual Fund will conduct Investor Meets for investors and educational programs at schools and colleges to spread the message of savings and investments to the youth of India.

AMFI has invited expression of interest (EOI) from software developers to develop, maintain, support and train for its long awaited Mutual Fund Utility Platform. The Mutual Fund Utility will provide order routing and payment mechanisms with connectivity to RTAs, AMCs, stock exchanges, DPs, banks and centralized KYC repository. The prospective software developers will have to develop the software in three months and maintain the software for five years post implementation. Investors will be able to make a single payment for multiple transactions. New investors into mutual funds will be required to open a ‘common account number’ and complete the KYC and submit the documents to the centralized account opening repository. The mutual fund Utility will then generate a unique account number for the investor which has to be used for all transactions in mutual funds. AMFI is likely to charge a fee for transacting through this platform in order to fund the maintenance costs. It will be operated on a ‘no profit no loss’ basis.

Regulatory Rigmarole

According to the Association of Mutual Funds in India the mutual fund industry has implemented the SEBI directive to issue consolidated accounts statement (CAS) to its investors from October 2011. This is an investor-friendly initiative to allow investors a single-window view of all their transactions in mutual funds. The consolidation of folios will be on the basis of the Permanent Account Number (PAN) provided by investors. Monthly CAS will include only those folios in which financial transactions have taken place during the month provided the folios have valid PAN numbers available for all the unit holders. CAS will include all types of financial transactions like purchase including NFOs, redemption including maturity, switches, systematic transactions like SIP, SWP, STP, dividend payouts or reinvestments, merger, bonus transactions etc. CAS will be sent on or before the 10th calendar day of the following month for folios which have been transacted in the previous month. Currently CAS will be sent only via physical and not electronic.

In order to improve transparency, market regulator SEBI has asked all mutual funds to disclose names of distributors, who receive commission in excess of Rs 1 crore annually or have presence in more than 20 locations, on their websites from March 2012. The disclosure, which would be uploaded on the mutual fund industry body AMFI’s website, is mandatory from November 10, 2011. Distributors earn an upfront commission from the mutual funds in the first year which is generally higher for selling equity schemes and lower for debt schemes. Further, they also earn a ‘Trail Commission’, which is a percentage of total business brought by the distributor. This commission is paid in the subsequent years and accounts for a huge earning for the distributors.

SEBI has allowed fund houses to participate in ‘AAA’ rated corporate debt securities with a 10% cap on exposure of the net assets of the scheme. The cumulative gross exposure through repo transactions in corporate debt securities along with equity, debt and derivatives shall not exceed 100% of the net assets of the concerned scheme. SEBI has directed fund houses to disclose the details of repo transactions of the schemes in corporate debt securities, including details of counterparties, amount involved and percentage of NAV in the half yearly portfolio statements and to SEBI in the half yearly trustee report.

Soon, you may be able to buy mutual fund units, shares, insurance policies, bank deposits and other such financial products with a single Know Your Customer (KYC) compliance. Financial Intelligence Unit-India (FIU-Ind), the national agency monitoring suspect financial transactions, has initiated discussions with different financial sector regulators to build a common database, which could be utilised by all financial services agencies. At present, each sectoral regulator - the Securities and Exchange Board of India, Insurance Regulatory and Development Authority, the Reserve Bank of India, Pension Funds Regulatory and Development Authority and the Forward Markets Commission have different KYC requirements. This means users are now required to fill in numerous columns in multiple forms every time they buy a new product. This common KYC database will help the different regulators and intermediaries monitor suspicious transactions and terrorist financing more efficiently.

Amid shrinking asset bases and declining investor folios, only a handful of mutual fund houses are pushing themselves to spread out to smaller towns and villages. As per data shared by asset management companies, about 15 of the 35 fund houses have over 80% of their assets mobilised from the top five cities - Mumbai, Delhi, Kolkata, Chennai and Bangalore. The industry body, Association of Mutual Funds in India (AMFI), had asked fund houses to disclose the geographical spread of assets managed by them. Higher proportion of fixed income assets - mainly belonging to banks and corporate treasuries headquartered in metros and top-tier cities - has skewed the spread of assets towards top cities. This, coupled with lower distributor support in smaller cities and increased focus of fund houses on city-based investors, has made mutual funds an exclusive investment product for urban Indians. Funds such as Peerless, Edelweiss Mutual, Sahara, Baroda Pioneer, Daiwa Mutual and Pramerica derive over 90% of their assets from four metros and tech-savvy Bangalore. The under-penetration of funds is not restricted to smaller and newer asset managers alone. Large fund houses like HDFC Mutual, Reliance, Birla Sunlife, and ICICI Prudential Mutual collect about 64-75% of their assets from top five cities. The asset spread of well-established large fund houses drop to about 11-15% in next 10 cities (cities after metros), about 4-5% in next 20 cities (after metros and top 10 non-metro cities) and about 2-3% in real small cities (cities beyond next 20 cities). Significantly, foreign fund houses such as DSP BlackRock, Franklin Templeton, Fidelity, and Mirae Asset have relatively strong presence in non-metro top-10 cities like Ahmedabad, Hyderabad, Rajkot, Indore, Pune, Nashik, and Jaipur. The obvious potential in smaller cities and towns (beyond the top 20) is largely retail which is long-term and sticky in nature. The fundamental challenge is of educating and hand-holding them to invest in the equity market through funds.

Monday, November 21, 2011

November 2011

Of Centuries and Millenia…

IDBI Gold Exchange Traded Fund, the NFO launched by IDBI Asset Management, has collected over Rs 110 crore, predominantly from around 11,000 retail investors, including HNIs. Indiabulls Mutual Fund has garnered Rs 1,107 crore through its maiden liquid fund, which was open for subscription for just one day. This is the first instance in this calendar year that any mutual fund has mobilised more than Rs 1,000 crore in a single working day.

Axis Capital Protection Oriented Fund – Series 1 (3 years)
Opens: November 8, 2011
Closes: November 22, 2011

Axis capital protection oriented fund – Series 1 (3 years) will endeavor to protect the capital by investing in a portfolio of debt and money market instruments that are maturing on or before the maturity of the fund. The fund also aims to provide capital appreciation through exposure in equity and equity related instruments. The fund shall invest 80-100% in debt and money market instruments including derivative instrument up to 75% of the net assets of the fund. The fund shall also invest up to 20% in equity and equity related instruments. The fund may also use fixed income derivative instruments subject to the guidelines as maybe issued by SEBI and RBI and for such purposes as maybe permitted from time to time. The fund shall not make any investments in securitized debt and unrated debt securities. The fund is benchmarked against the Crisil MIP Blended Index. The fund managers of the fund are R. Sivakumar and Sudhanshu Asthana.

Templeton India Corporate Bond Opportunities Fund
Opens: November 15, 2011
Closes: November 29, 2011

Franklin Templeton Investments has launched Templeton India Corporate Bond Opportunities Fund in order to help investors take advantage of the current high yields and to build a strong presence in pure fixed income space. Templeton India Corporate Bond Opportunities Fund will primarily invest in medium and short-term securities issued by corporates. It will focus on corporate bonds with moderate maturity and relatively higher accruals. Its average maturity will never exceed three years. The fund also aims at allowing capitalisation on opportunities by active interplay on credit, liquidity, and interest rate opportunities. The corporate bond market provides good opportunities in India for multiple reasons, including a fast growing economy, strong corporate balance sheets, and expected increase in issuances. However, when compared to other similar markets, the corporate bond market in India is still at a nascent stage and is growing. Mr. Umesh Sharma and Mr. Sachin Padwal Desai will manage the fund together. The fund is benchmarked against Crisil Short Term Bond Fund Index.

Religare Gold Fund
Opens: November 15, 2011
Closes: November 29, 2011

Religare Mutual Fund has launched a new fund namely, Religare Gold Fund an open ended fund of fund. The investment objective of the fund is to provide returns, which closely correspond to returns provided by Religare Gold Exchange Traded Fund. The asset allocation is up to 95% in gold and balance 5% in debt and money market instruments. This fund is well suited for people who do not have a demat account but want to invest in gold. Besides acting as a hedge against inflation, Religare Gold Fund provides easy liquidity, less charges compared with gold jewelry and coins, no worry about gold theft and offers SIP facility. The performance of the fund will be benchmarked against the prices of gold and will be managed by Mr Nitish Sikand.

Sundaram Capital Protection Oriented Fund – Series 4 (5 years)
Opens: November 18, 2011
Closes: November 30, 2011

Sundaram Capital Protection Oriented Fund-Series 4 - 5 yrs, is a close-ended capital protection oriented scheme. The objective of this fund would be to seek income and minimise risk of capital loss by investing in a portfolio of fixed income securities. The scheme may invest a part of the assets (0 to 30%) in equity to seek capital appreciation. The fund manager of the equity portion of the fund is Srividhya Rajesh and that of the debt portion is Dwijendra Srivastava. The fund is benchmarked against the Crisil MIP Blended Index.

Union KBC Tax Saver Scheme
Opens: November 8, 2011
Closes: December 9, 2011

Union KBC Mutual Fund has launched a new fund named as Union KBC Tax Saver Scheme, an open ended Equity Linked Savings Scheme with lock in period of 3 Years. The investment objective of the scheme is to achieve long-term capital appreciation by investing substantially in a portfolio consisting of equity and equity related securities. The scheme will allocate between 80-100% in equities and up to 20% in debt. The fund manager will follow a combination of bottom up and top down approach in his investment strategy. The performance of the scheme will be benchmarked against BSE 100 Index and will be managed by Mr. Ashish Ranawade.

Sundaram Capital Protection Oriented Fund 2 Years (Series 6-7), Sundaram Capital Protection Oriented Fund 5 Years (Series 5-6,) Sundaram Capital Protection Oriented Fund 3 Years (Series 9-10) and BNP Paribas Gold and Income Fund are expected to be launched in the coming months.

Monday, November 14, 2011

November 2011

There are 48 Equity Linked Saving Schemes offered by 41 mutual fund houses. Out of this 36 are open-ended schemes and 12 are close-ended schemes. The industry wide assets for all ELSS are Rs 26,515 crore representing around 4% of the industry corpus. ELSS Funds help you save taxes as well as generate decent returns. But, how do you separate the wheat from the chaff?

GEMGAZE does it for you. The towering tycoons in the tax-saving space have retained their GEM status and have secured their position in the hall of fame by virtue of their consistency.

Magnum Taxgain Fund Gem
Losing steam?

Launched in March 1993, SBI Magnum Taxgain is one of the oldest and largest tax-saving ELSS schemes in the country with an AUM of nearly Rs 5000 crore. An interesting feature of the fund is its stock picking which is more inclined to companies that have disproportionately large market share. For a fund with a size as large as Rs 5,000 crore, SBI Magnum Taxgain's portfolio is well diversified to incorporate an average of about 60 stocks across sectors. The top 5 holdings account for 22.69% of the portfolio. While the fund has a multi-cap approach, it is clearly biased towards large-cap stocks. Nearly 70% of its equity portfolio is invested in the large caps. For the sectoral allocation, the fund has a reasonable exposure in healthcare and FMCG sectors, with an exposure of 10% and 7%, respectively. However, compared to the benchmark BSE 100, the fund is underweight on the financial sector, which was one reason for the fund's underperformance in 2010. It maintains 3% of AUM in cash. Over the past few years, it has developed itself into a defensive investment and therefore, failed to outperform the benchmark returns even when the market was rallying. Until SBI Magnum Taxgain moves out of its defensive positioning, investors can expect consistent but not outstanding returns. One-year return of the fund is –17.67% as against the category average of –18.35%. The expense ratio is 1.81% and the portfolio turnover ratio is 0.42%.

HDFC Tax Saver Fund Gem
Consistent contrarian

At Rs 3032 crore, it is the second largest ELSS fund in the industry. With the exception of 2007, the fund has done well in falling as well as rising markets. In keeping with its large size, fund manager prefers to diversify the portfolio, perhaps a bit much. It follows an investment strategy wherein it looks to invest in stocks irrespective of the market capitalization to take advantage of the then prevailing market conditions. Currently, large caps account for 60% of the portfolio. HDFC Taxsaver takes contrarian bets but its performance history speaks for itself. It is among the very few funds, which have invested in the Indian Depository Receipts (IDR) of Standard Chartered PLC (UK) and is amongst the few not holding Reliance Industries in its portfolio. Even in its sector allocation the fund is not wary of contrarian moves. The rising asset base has led to an increase in the number of stocks to 38. However, the fund has a long tail of stocks (currently 23) each with an allocation of less than 1%. They collectively account for close to 10% of the fund's portfolio. With the top 5 holdings accounting for 30%, the fund looks well diversified. Allocation to a single stock has rarely exceeds 7%. The expense ratio is 1.84% and turnover ratio is 32.19%. In the past one year, the fund has earned a return of –17.58% as against the category average of –18.35%. The fund has generated superior returns and shown resilience while protecting the downside time and again. You seldom get a mutual fund with a history of 14 years with consistent performance.

Fidelity Tax Advantage Fund Gem
Award-winning spree…

Fidelity Mutual Fund has won three awards for its Fidelity Tax Advantage Fund at the ICRA Mutual Fund Awards 2011. The Fidelity Tax Advantage Fund received the ICRA 7-Star Gold Award and the 5-Star Award in the Equity Linked Savings Schemes (ELSS) category for its 3-year performance and 1-year performance respectively as on December 31, 2010. The ICRA 7-Star is awarded to the best performing fund in the category and the ICRA 5-Star is awarded to the top 4.6% in terms of performance in the category. The one-year return of the Rs 1183 crore fund is –14.35% as against the category average of –18.35%. The fund has had a glorious run so far. What sets the fund apart is consistency in its portfolio—its top 10 scrips and sectors have been consistent throughout 2010. The fund manager goes by the balance sheet more than what the market is chasing. So it is not surprising to see that 17 of his holdings have been held in the portfolio almost since inception. Despite a large-cap bias, the portfolio is very diversified across 64 stocks. Apart from Reliance Industries, allocation to a single stock has rarely exceeded 6% of the portfolio. However, the fund takes numerous small bets. Fidelity Tax takes significant exposure to mid-cap stocks as with many funds of this genre. This has been to the tune of 20-25% of the portfolio across market cycles. This enables the fund to benefit from broader market rallies. Top 5 holdings constitute 25% of the portfolio. The expense ratio is 2% and the portfolio turnover ratio is 20%.

Sundaram Tax Saver Fund Gem
Off the mark…

Launched on November 12, 1999, Sundaram Tax Saver fund is managed by Mr Satish Ramanathan, Head of Equities at Sundaram Mutual Fund. The fund has a concentrated portfolio of 43 stocks with 69% of the portfolio invested in large-cap stocks. The fund is very actively managed and is also known for taking cash calls when the fund manager is not bullish on the market. The huge cash call, which the fund took in 2008, really helped the fund during the 2008 crisis. In last couple of years, the fund has seen its AUM increasing substantially from around Rs 480 Crore to more than Rs 1,407 crore. Top five holdings constitute 22% of the portfolio with a total of 41 stocks. Energy, financial and FMCG are the top 3 sectors. The fund follows both top-down and bottom-up approach for making investments. Its one-year return has been –20.79% as against the category average of 18.35%. The expense ratio is 1.95% and the portfolio turnover ratio is 190%.

Canara Robeco EquityTax Saver Fund Gem
Consistent outperformer…

Though around for a long time, Canara Robeco Equity Tax Saver has emerged as a strong contender only from 2007, thanks to its diversified portfolio. The fund invests in growth-oriented companies with strong fundamentals, making it a consistent offering. This Rs 302 crore fund has been pretty successful in utilising the agility that a small fund offers by spotting opportunities and capitalising on them. There are 52 stocks in the portfolio. Though allocation to a single stock has gone up to 9%, it is seen only in few large caps. Allocation to the top 5 holdings (24%) is in line with the category average. In 2010, exposure to mid caps was halved and that to large caps increased to around 70%. However, allocation to small caps has barely exceeded 15% since 2007, a drastic change from its past. The massive outperformance though has been possible as a result of 20% holding in midcap stocks. The fund also appears adept in reducing stakes in equity and switching back again. This helped it contain declines to about 47% in the 2008 market fall as against 55% equity category average. One-year return is –11.61% as against the category average of –18.35%. The expense ratio is 2.33% and portfolio turnover ratio is 57%.

Religare Tax Plan Gem
Ferocious fledgling…

With downside protection and decent returns, Religare Tax Plan made its mark in a short period of time. The fund’s ability to provide good downside protection capabilities accompanied with decent returns during markets rallies rewards investors over the long run. The fund’s focus on bottom-up stock picking leads to quality picks. The mid-cap picks are biased in favour of growth, quality of balance sheet and strength of underlying cash flow rather than sheer under valuation plays. Momentum and cyclical plays are avoided, which may result in subdued returns during market rallies. The late entry into technology also hit performance. Selective (and unusual) stock picking is the strategy of the fund. You may have to wait a while for the bets to play out. It has done well across market cycles. The fund follows a multi-cap strategy. Although benchmarked against BSE 100, the base universe is the BSE 200, to which stocks in the CNX Midcap index are added. Moreover, a few handpicked companies from the BSE Small Cap and BSE PSU indices are considered. This universe is reviewed every quarter.Under normal circumstances, allocation to a single stock is restricted to 6%. The top three sectors are finance, energy, and services. The fund is well-diversified with 50 stocks and the top five holdings constitute 26%. Large cap stocks make up 59% of the portfolio. The one-year return is –13.43% as against the category average of –18.43%. The expense ratio is 2.49% and the portfolio turnover ratio is 62%. With a corpus size of Rs 110 crore, Religare Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch.

DSPBR Tax Saver Gem
Temporary lull?

The fund uses a multi-cap strategy like many of it peers and also deploys cash efficiently. Banking sector, a favored sector in the past rallies, does figure as the top sector even in the recent portfolio. Its top 5 sector picks constitute both growth-oriented and defensive sectors. The churning of stocks too is quite aggressive, which may subject the fund to volatility in returns. DSPBR Tax Saver has a fund corpus of around Rs 941. The fund has a growth-oriented multi cap portfolio with 54% of the corpus in large cap stocks. There are 81 stocks in the portfolio. DSP BR Tax Saver fund has offered –21.6% returns for the last one year as against the category average of –18.35%. The expense ratio is 2.11% and the portfolio turnover ratio is 70%.

Monday, November 07, 2011

November 2011

Goodbye ELSS!

We never did envisage the day when ELSS would become a thing of the past. From April 2012, this entire category of equity based tax saving schemes would be history. Frankly, this is a blow to investors. ELSS was the only tax saving instrument that combined tax saving with the higher return that is possible only through equity and the lowest lock-in period amongst all the other saving schemes. In fact, for many young investors, it was the gateway product through which they entered the stock market. It was after exploring this avenue that they began to get a taste for investing in diversified equity funds. Fund managers certainly were fond of these products. The 3-year lock in period ensured that investors could not walk out anytime and so sudden or frequent redemptions were not a prime concern. This enabled them to take a longer-term perspective on their portfolio.

Extinction of the generic ELSS?

ELSS Fund has become a generic term in the mutual fund industry. If we expand this term and say Equity Linked Savings Scheme Fund – it sounds odd. The assets under management of the 49 open and closed-end ELSS funds stand at Rs 24,571 crore. This is about 3.5% of the overall industry AUM and nearly 15% of the assets managed by all equity funds. ELSS products were introduced nearly two decades ago and initially there was a cap on investments allowed under this category, which was withdrawn around seven years ago. Investors are shifting from lump-sum investment to the systematic investment plan. The number of IFAs (independent financial advisors) selling mutual funds has come down significantly over the past year. This trend has hit inflows into ELSS in a big way. Lack of clarity on tax implications under the impending new DTC (Direct Tax Code) rules was the last straw on the camel’s back. ELSS Funds are on the death row. Their demise is slated for April 2012, when the Direct Tax Code comes into effect. This kept retail investors away from ELSS funds during the last fiscal, when inflows plunged 58%. Net inflows into equity-linked saving schemes, which provide tax benefits to investors, dropped to Rs. 606 crore last fiscal from 1,437 crore a year earlier. At the peak of the bull market in 2007, these funds raised assets worth 5,499 crore in the "tax-season months" between October 2007 and March 2008.

Promising performance

Over a 3 year time frame, most ELSS mutual funds have delivered competitive returns with Religare Tax Plan being the frontrunner (by delivering a return of 16.1% CAGR). Moreover, it has exposed its investors to fairly low risk (as revealed by its Standard Deviation of 7.72%), but has provided luring risk-adjusted returns (as revealed by the Sharpe Ratio of 0.15), thus making it a low risk-high return investment proposition in the category. Interestingly, the returns have been clocked by the fund without indulging in much portfolio churning (as revealed by its low portfolio churning of 0.66 times). Similarly, the other ELSS Funds such as Fidelity Tax Advantage Fund, Reliance Tax Saver Fund, Franklin India Taxshield Fund, HDFC TaxSaver Fund and DSPBR Tax Saver Fund too have delivered appealing returns over a 3-year time frame by managing their risk well (i.e. keeping it low) and thus providing luring risk-adjusted returns. As far as portfolio strategy is concerned, most ELSS funds hold a fairly diversified equity portfolio but predominantly of large caps. Moreover, most ELSS mutual funds generally follow a blend style of investing which enable them to follow both - growth as well as value investing. Speaking about the sectoral exposure, they generally occupy positions depending upon how the respective fund manager perceives each sector to be resilient and offers promising long-term growth prospects. However, as an approach to stock picking they follow the bottom-up approach, which help to identify promising investments.

Points to ponder
In the past, at present…

Invest in ELSS with a holistic perspective. First check your overall portfolio. Does it need more equity exposure? If yes, then you can go for ELSS; if no then you can go for PPF or NSC. Do not invest in ELSS except from tax saving point of view. Otherwise, it is better to invest in plain vanilla diversified equity funds. There are basically two reasons - liquidity and performance.

Spread your investment across 2 ELSS funds but not more. Choose growth over dividend and reinvestment option. Equity investments are for long term, say 5 years or more. Though the lock-in period in ELSS is 3 years, it is better to invest with a time horizon of 5 years or more.

You need to keep in mind that systematic investment plan is the best form of investing in mutual funds and ELSS is not an exception. So doing a SIP in ELSS is a good strategy to be followed.

You need to be careful in choosing the right ELSS scheme. Past performance, risk adjusted return, consistency over a minimum of three years are a few parameters to be evaluated in selecting a best performing ELSS scheme. Be wary of advertised returns.

…and in the future

Investments made before the date of commencement of DTC, in instruments which enjoy exempt-exempt-exempt (EEE) method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument. Individuals who want the tax benefit by investing in ELSS have only till March 31, 2012 to avail of it. Make hay while the sun shines. Which brings us to the next question, what will happen to ELSS Funds? Will all these tax saving schemes morph into plain vanilla equity diversified schemes? Once the tax saving benefit is pulled out, the lock-in period of 3 years makes absolutely no sense. We will have to wait and watch to see how funds deal with it.