FUND FULCRUM

November 2013

 

The mutual fund industry witnessed its fastest month-on-month percentage growth this fiscal with nearly 12% rise in assets under management (AUM) to Rs 8.34 lakh crore in October 2013 due to sound inflows into liquid schemes, according to a CRISIL report. According to the Association of Mutual Fund in India (AMFI) data, AUM of liquid funds rose by 55% to Rs 1.89 lakh crore due to inflows of Rs 67,500 crore, which is the highest in the past six months on the back of cyclical inflows and RBI's liquidity easing measures. Meanwhile, assets under income and gilt funds also witnessed rise on MTM gains. While the income funds category saw inflows of Rs 3,100 crore in October 2013, resulting in 2.2% rise in its AUM to Rs 4.34 lakh crore; gilt funds posted 1.5% gain in its assets to Rs 7,500 crore. Despite outflows of over Rs 3,500 crore in October 2013, which is the highest for equity funds in the past 13 months, assets under this category rose 7% to Rs 1.73 lakh crore. Continued underperformance of small- and mid-cap stocks has prompted fund managers to increase the size of their cash holding. A mix of redemption pressure and a lack of conviction in the recent rally have prompted them to remain cautious and they are not deploying money into the stocks despite the recent outperformance. In the gold ETF category, assets declined by 5% to fall below Rs 10,000 crore due to MTM losses. Fixed maturity plans continued to get inflows due to rise in bond yields in the past couple of months.

Equity AUM of top 10 fund houses saw a decline of 8% from Rs 1,50,336 crore to Rs 1,38,870 crore, a fall of Rs 11466 crore, during the period September 2012 to September 2013 despite an overall rise of 8% in the AAUM of the industry. India's largest fund houses, HDFC MF and Reliance MF saw a decline of Rs 2226 crore (7%) and Rs 2876 (12%) respectively in the equity corpus.  DSP BlackRock also saw its equity AUM dipping by 21% or Rs 2255 crore during the same period. Those fund houses which had garnered maximum inflows in their equity funds during the 2007-08 run are the worst affected during September 2012 to September 2013 since investors were looking to break even and exit. Of the top 10 fund houses, only two fund houses – ICICI Prudential MF and IDFC, witnessed growth of 1% and 11% respectively in their equity AUM during the period. ICICI Prudential MF has recorded an inflow of Rs 121 crore whereas IDFC MF added an additional Rs 579 crore in its equity funds from September 2012 to September 2013. This growth in equity funds can be attributed to better performance of fund managers, launch of investor-centric products, and co-ordination with advisors.

Investors have pulled out nearly Rs 34,000 crore from various mutual funds in September 2013 as against a high inflow of  Rs 23,713 crore in such schemes in August 2013. According to SEBI data, at gross level, mutual funds mobilised Rs 8.67 lakh crore in September 2013, but also witnessed redemption worth Rs 9 lakh crore -- resulting in a net outflow of Rs 33,910 crore. This has brought down the total assets under management of mutual funds to Rs 7.46 lakh crore as on September 30, 2013 from Rs 7.66 lakh crore in the previous month. The huge outflow coincides with 494 points or 2.6% rise in the benchmark S&P BSE Sensex during the period under review. During the financial year 2013-14 so far (Apr-Sept), mutual funds mobilised Rs 35,342 crore as compared to Rs 1,01,875 crore mobilised in the corresponding period of 2012-13. In the entire fiscal 2012-13, mutual funds had garnered Rs 76,539 crore from investors while a net amount of over Rs 22,000 crore moved out of the mutual funds' kitty during the preceding fiscal.

 

Piquant Parade

With the improvement in liquidity conditions, Reserve Bank of India has decided to close the special window of Rs 25,000 crore for commercial banks to meet the cash requirements of the crisis-ridden mutual funds with immediate effect. 

FundsIndia.com, a mutual fund investment platform, has launched 'Instant Investing' that will enable investors to invest in a host of mutual fund schemes. Any investor who is KYC certified with CVL KRA can now logon to FundsIndia.com and enter their PAN and bank details to start investing, without any paperwork or signatures. Currently, investors can invest in the schemes of five mutual fund companies through this process and more are expected to join very soon.

According to SEBI’s Investment Adviser Regulation, an individual registered as investment advisor shall have a certification from NISM or any other organization or institution provided that such certification is accredited by NISM. The accredited organisation can brand and decide the course curriculum. However, the curriculum should be in line with the existing courses of NISM such as NISM-Series X-A, Investment Adviser Level 1 and Level 2, etc. NISM may suggest changes to the course curriculum, administrative capacity, etc. Keeping in mind the criteria like background of the organization and policies and processes followed for the certification examination, NISM will accredit the certification. Initially, the accreditation will be given for one year which can be later renewed for two more years. However, NISM can terminate accreditation if it receives complaints like poor quality of content, lack of periodic updates or irregularity. To ensure the quality of accredited certification examinations, NISM will conduct inspections from time to time and may also audit the processes and procedures followed to conduct accredited certification examinations. Applicants have to pay a non-refundable fee of Rs 1 lakh for accreditation along with their application forms. Accreditation committee will scrutinize the applications and make recommendations to NISM for grant of accreditation. The accredited organisations have to pay accreditation fees of Rs 1 lakh per certification accreditation and Rs 2 lakh for renewal of each accreditation. In addition, NISM will charge fees of Rs 300 per candidate for maintenance of record. The last date of submission of application is November 15, 2013. 

 

Regulatory Rigmarole

SEBI's mutual fund advisory committee has suggested revising the existing networth criterion from Rs 10 crore to Rs 25 crore and giving three years for mutual funds with assets of less than Rs 1,000 crore to meet the new norms. Those with assets under management (AUM) of more than Rs 1,000 crore should not be given more time to meet the Rs 25 crore criteria. The committee has suggested Rs 25 crore as the minimum net worth for new players. The committee has also recommended that fund houses need to put in seed capital of Rs 50 lakhs for each scheme. This would be counted as part of net worth and excludes fixed maturity plans. The recommendations of the mutual fund advisory committee would be sent to SEBI for approval. Previously, SEBI had put in place a Committee on Review of Eligibility Norms, which had recommended a higher net worth of Rs 50 crore for AMCs, in 2010.

The proposal to levy a ‘super-rich’ tax, at the rate of 35%, on those earning more than Rs 10 crore a year might not receive support of the Union Cabinet, which is to consider the Direct Taxes Code (DTC) Bill this month. This is because the government might not like to sully the business environment in the country in the run-up to the general elections. The finance ministry is moving a supplementary note to propose changes in the DTC Bill sent to the Cabinet in August 2013. The other amendments to the DTC Bill, 2010, that the Cabinet might consider this month are retention of current exemption limit for IT at Rs 2 lakh, fast-track courts for black money cases, doing away with Settlement Commission to resolve tax disputes, continuation of exemption from tax on maturity of some long-term saving instruments, and retention of MAT on book profits.

The RBI plans to extend the ambit of its policy on 'Treating Customers Fairly' (TCF) beyond banking products to third-party ones such as insurance and mutual funds. The move comes on allegations that several public and private sector banks were guilty of practices that encouraged money laundering and violated know-your-customer (KYC) norms and anti-money laundering (AML) rules in the sale of gold and other third-party products. TCF is a consumer protection policy, designed to address the problem of asymmetric information in the financial services sector. It is a regulatory initiative in which companies are required to consider their treatment of customers at all stages of the product life-cycle, including the design, marketing, advice, point-of-sale, and after-sale stages. RBI says it has taken a lead in ensuring banks' customers in India are treated fairly.

The performance of mutual funds is not that rosy over a one-year time frame, if you compare the performance to the gains they made against the benchmark - a key factor in evaluating a fund's performance. Out of 139 mutual funds of the top 10 equity mutual fund houses by AUM, only 59 could outperform their benchmarks in the past year. At first look, these numbers should paint a grim picture. In the previous bull markets, more funds beat their benchmarks. This time, performance has been concentrated in a select few sectors and stocks. On the other hand, funds have been keeping a more diverse holding in their portfolios, even from sectors that have not participated in this market rally. Funds face redemptions and have to keep some of their money in liquid counters. This tends to impact performance. However, the performance over three years gets better. Nearly 60% of the existing funds of the top houses have beaten their benchmarks. Time plays a crucial role in this outperformance. The more a fund stays invested in a sector or stock, the better its returns can get. Performance over the past five and 10 years gets even more impressive. It shows the returns getting progressively better. In those two time spans, 68% and 93% of the funds managed to beat their benchmarks. This exercise suggests that over a short time-frame, funds are not able to beat their benchmark; but over the longer one, more of them can easily do so. Then, why are so many investors dumping their funds instead of staying put for the long run? Among the many reasons are that investors look at just the very short-term performance of funds. They are not eyeing long-term returns. Studies have found that a combination of good funds with better risk-adjusted returns can give a much better performance for the same amount of risk. In the long run, it is about having the right combination of funds as well. If one selects a few funds with a good diversified focus, then they can also beat the benchmarks even if one of these funds is not doing well in the short-run. A combination of mixing and matching between different segments of the market, such as large- mid- and small-cap funds is a better way to buy mutual fund investments. However, even if majority of your funds are not working in the short run, there is a greater chance that given enough time, majority of these will deliver better returns.

NFO NEST

November 2013

 

Closed-end funds on a comeback trail?

 

Mutual funds hit by redemptions from equity funds in recent months, are turning to lock-in products for bringing stability to their assets under management. Three closed-ended equity funds have been launched in the past month or so and another is set to open soon for subscription. A lock-in product would help funds churn better returns over the longer run, as many mid- and small-cap stocks are trading at cheaper valuations. Moreover, such a fund forces investors to stay invested for the long term. The lock-in for these products is between three and five years. The investment horizon of smaller investors, particularly in equity, had become extremely short, leading to heavy redemptions. But, investors would not like to lock-in when the markets are turbulent.

Ironically, fund houses are now rushing to launch equity funds as the market revives with three equity funds figuring in the November 2013 NFONEST.

R* Share Nifty ETF

Opens: November 8, 2013

Closes: November 19, 2013

Reliance Mutual Fund has launched a new fund in name of R*Share Nifty ETF. The objective of the fund is to provide investment returns that, before expenses, closely correspond to the total returns of the securities as represented by the CNX Nifty Index, subject to tracking errors. It invests in securities constituting CNX NIFTY Index (95%–100%) medium to high risk profile and Money Market instruments including CBLO (with maturity not exceeding 91 days) (0% – 5%) low to medium risk profile. The fund’s performance will be benchmarked against CNX Nifty Index and its fund manager is Krishan Daga.

ICICI Prudential Capital Protection Oriented – Series IV Plan F (60M)

Opens: November 7, 2013

Closes: November 21, 2013

ICICI Prudential has launched a new fund ICICI Prudential Capital Protection Oriented Fund Series IV Plan F. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt securities will mature on or before the maturity of the fund. Rajat Chandak, Rahul Goswami, and Atul Patel are the fund managers.

Axis Small Cap Fund

Opens: November 11, 2013

Closes: November 25, 2013

Axis Mutual Fund has unveiled a new fund Axis Small Cap Fund, a five year close ended equity fund with automatic conversion into an open ended equity scheme on completion of 5 years.  The investment objective is to generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity related instruments of small cap companies. The fund will allocate 80% to 100% of assets in equity and equity related instruments of small cap companies, 0% to 20% of assets in equity and equity related instruments of non-small cap companies.  The fund will allocate upto 0% to 20% of assets in debt & money market instruments. The fund’s performance will be benchmarked against CNX Small-cap Index. The fund will be managed by Pankaj Murarka.

 

Pramerica Midcap Opportunities Fund

Opens: November 11, 2013

Closes: November 25, 2013

Pramerica Mutual Fund has launched a NFO in the name of Pramerica Midcap Opportunities Fund. The investment objective of the fund is to achieve long-term capital appreciation by predominantly investing in equity and equity related instruments of mid cap companies (65%–100%), equity and equity related instruments of Large Cap and Small Cap Companies (0%–35%) and Cash, Money Market, Debt Securities, Liquid and Debt fund of Pramerica Mutual Fund (0% – 35%). The fund will be benchmarked against CNX Midcap Index. B P Singh will manage the fund.

LIC Nomura Mutual Fund Capital Oriented Fund Series 1

Opens: November 11, 2013

Closes: November 25, 2013

LIC Nomura launched 'Capital Protection Oriented Fund- Series I', a 36 month close ended fund. The product is designed for investors who are seeking to achieve capital protection. The fund will invest 85% in debt and 15% in equity. The investment objective of the fund is to achieve capital protection by investing in fixed income securities maturing on or before the tenure of the fund and seeks capital appreciation by investing in equity and equity related investments. The fund is managed by Y.D. Prasanna.

ICICI Prudential Multiple Yield Fund – Series 5 – Plan B

Opens: November 15, 2013

Closes: November 29, 2013

 

ICICI Prudential has launched a new fund ICICI Prudential Multiple Yield Fund – Series 5 – Plan B. The primary objective of the fund is to seek to generate income by investing in a portfolio of fixed income securities/ debt instruments. The secondary objective of the fund is to generate long term capital appreciation by investing a portion of the fund's assets in equity and equity related instruments. Rajat Chandak and Aditya Pagaria are the fund managers.

Reliance Close Ended Equity Fund – Series A

Opens: November 15, 2013

Closes: November 29, 2013

Reliance Mutual fund has launched a new fund -- Reliance close-ended equity fund- series A -- having a five year lock-in period. The fund aims to provide capital appreciation to the investors, which will be in line with their long-term savings goal, by investing in a diversified portfolio of equity and equity related instruments with small exposure to fixed income securities. The fund will invest across all market caps to retain the flexibility in portfolio adjustment. Sailesh Raj Bhan will be the fund manager.

ICICI Prudential Value Fund – Series 2

Opens: November 18, 2013

Closes: November 29, 2013

ICICI Prudential Value Fund is a three- year close-ended equity fund, which will invest in 25-30 high conviction stocks by following a value investment philosophy. The investment objective of the fund is to provide capital appreciation by investing in a well diversified portfolio of stocks through fundamental analysis. The fund managers are Sankaran Naren and Atul Paul. The fund is benchmarked against S&P BSE 500 index.

Religare Invesco Asia Consumer Demand Fund, Pramerica Overnight Fund, DWS Medium Term Income Fund, Union KBC Capital Protection-oriented Fund Series 4 and 5, Sundaram RGESS Fund Series I to V, J P Morgan Europe Dynamic Equity Offshore Fund, Religare Invesco Pan European Equity Fund, Reliance Japan Equity Fund, and HDFC Retirement Savings Fund are expected to be launched in the coming months.

GEM GAZE 
November 2013

As a pure equity option, ELSS funds have long been investors' favourite as they combine the need to save tax with the possibility of higher returns owing to their exposure to equity. That they come with a lock-in of three years relieves the fund manager from redemption pressure for that time period. These funds provide an excellent alternative to other tax saving options under Section 80C like fixed deposits, national savings certificate, PPF, etc. Moreover, this is the only pure equity investment avenue available to the investors among the other fixed income options. Unlike other categories, the inflow in these funds is usually higher in the second half of the financial year as people tend to finalise their tax-saving investments as the financial year draws to a close. These funds have generated decent returns over a time period with the 10-year annualised return of 17.16% which is above the Sensex return of 15.61% for the same time period.

All the GEMs of the 2012 GEMGAZE have retained their GEM status in the 2013 GEMGAZE also save one – Sundaram Tax Saver - which has not been performing well for quite sometime now.

Magnum Taxgain Fund Gem
Refinement in process

 

SBI Magnum Taxgain is one of the oldest and largest tax-saving ELSS schemes in the country with an AUM of Rs 3,866 crore. Over the last few years, we have seen several changes take place that are steps in the right direction. On the process front, up until 2011 manager Jayesh Shroff freely took active positions versus the benchmark index S&P BSE 100 according to his convictions. However, the execution often left a lot to be desired. In addition, Shroff tended to overweight sectors wherein he had expertise, thereby, risking missing out on opportunities in other areas. However, since 2011, Shroff has been plying a benchmark-aligned growth-oriented approach in place of the erstwhile benchmark-agnostic process. According to the new strategy, the portfolio’s sector weights are loosely aligned with those of the S&P BSE 100 index (within the range of +/- 7 percentage points). This was a positive change that resulted in the process becoming more disciplined. The investment team, which has seen significant turnover in the past, is gradually gaining traction. An interesting feature of the fund is its stock picking which is more inclined to companies that have disproportionately large market share, with 71% of the funds in large cap stocks. There are 48 stocks in the portfolio, with the top 5 holdings accounting for 27.8% of the portfolio. The top three sectors that the fund invests in are finance, technology, and energy. One-year return of the fund is 6.05% as against the category average of 5.62 %. The expense ratio is 2.02% and the portfolio turnover ratio is 17%.


HDFC Tax Saver Fund Gem
Consistent reward to investors

At Rs 3095 crore, HDFC Tax Saver is the second largest ELSS fund in the industry. The fund is managed by Vinay Kulkarni, who is well-ingrained into the HDFC investment philosophy and has a reasonably strong track record. Kulkarni's focus on the long-term strength of a business is a positive and it complements his style of investing for the long haul. Kulkarni also takes large stock and sector bets, often against the grain. This is linked to the research-intensive approach and the caliber of the investment team, which helps pull off such a strategy. But Kulkarni's big bets can result in severe underperformance in the short term. His valuation consciousness also can hold back the fund versus peers when markets are rewarding speculative fare. The fund's poor performance in 2007 when stocks in overheated sectors such as power utilities, real estate, and metals were the season's flavour is a case in point. Nevertheless, over longer time frames when markets experience a cycle, the manager's investment style and expertise will hold the fund in good stead. Many tax saving funds have taken a deep cut in their NAV during bear markets, owing to their mid-cap focus. HDFC Tax Saver, though, has learnt from past lessons and has increased its large-cap exposure. Currently, large caps account for 62% of the portfolio. With 57 stocks and the top 5 holdings accounting for 30%, the fund looks well diversified. The top three sectors that the fund invests in are finance, technology, and energy. In the past one year, the fund has earned a return of 5.17% as against the category average of 5.62%. The expense ratio is 2.3% and turnover ratio is 37%. 

 Canara Robeco Equity Tax Saver Fund Gem

 Aggressive gamble?

Canara Robeco Equity Tax Saver’s focus on growth-oriented companies has made it stand out in the crowd. Going by its performance over the past five years, consistency is what stands out, whether in a bull market or a bear one. This Rs 560 crore fund has been pretty successful in utilising the agility that a small fund offers by spotting opportunities and capitalising on them. There are 58 stocks in the portfolio. Allocation to the top 5 holdings (29%) is in line with the category average. Over the past five years, energy, financial services and technology have been part of the top five sectors and the top three sectors are finance, technology, and energy, in that order. The fund has maintained a compact portfolio without compromising on diversification. The fund invests in companies with a strong competitive position in good businesses with a quality management. It has been among the top performers in the tax saving funds category and has delivered returns consistently across market cycles. It consistently beats its benchmark, irrespective of the timing of one's investment, making it a good addition to a core portfolio. Canara Robeco Equity Tax Saver has outperformed its category average four times in the past five years. Over one-, three- and five-year time periods, the fund has outperformed its benchmark – BSE 100. The level of outperformance has been to the tune of 2-8 percentage points. However, the frequent change in fund management in recent years is a cause of concern for investors. A large-cap focus and the ability to shift in and out of cash positions depending on market volatility has helped the fund tide over corrections and reasonably ride on rallies. One-year return is 5.25 % as against the category average of 5.62 %. The expense ratio is 2.65% and portfolio turnover ratio is 55%.  

Religare Invesco Tax Plan Gem
Potential to deliver

With a corpus size of Rs 128 crore, Religare Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. Religare Tax Plan seeks to invest in emerging mid-cap companies that have the visibility to grow through the economic cycles. However, being a tax plan with the mandated three-year lock-in period, it can afford to take these chances as the mid-cap theme is bound to play out over longer tenures. The scheme focuses on investment in niche businesses that are expected to grow in size, and allow these businesses time to grow. If this strategy increases the short-term risks, then the presence of blue-chips balances the portfolio's risk. As apparent from its performance track record, the fund’s forte is negotiating volatility and protecting investors from the downside. The fund’s competency in tackling volatility is further substantiated by its lower standard deviation of 23.1% as against the category average of 25.8% over a three-year period. Furthermore, the fund’s downside capture ratio during that period is also impressive. It captured only 72% of the downside of the category benchmark index (BSE 200), compared to a relatively higher 87% of the downside suffered by a typical peer fund. The fund invests across market capitalisation and sectors and spreads its assets over 49 stocks without being overly diversified and the top 5 holdings constitute 30%. The top three sectors are finance, technology, and energy. At present, large cap stocks make up 51% of the portfolio. The one-year return is 7.65% as against the category average of 5.62%. The expense ratio is 2.91% and the portfolio turnover ratio is 33%.

DSPBR Tax Saver Fund Gem

Risky reward

DSP Black Rock Tax Saver gets hit harder during bad times, but bounces back impressively in rallies. There was a change of guard at this fund’s helm in July 2012. Manager Anup Maheshwari relinquished portfolio management duties and Apoorva Shah took over. But, the investment process remains unchanged. The fund continues to follow a flexi-cap approach wherein the focus is to generate superior returns over a three-year period by moving across sectors and market caps in an unconstrained manner. The stock-picking is rooted to a bottom-up approach, where the main focus is on picking growth-styled stocks. There is a top-down overlay when taking sector bets, where the focus is on identifying sectors that demonstrate strong pricing power. The manager also pays heed to portfolio construction, with strong emphasis on liquidity and risk mitigation. DSPBR Tax Saver has a fund corpus of around Rs 684 crore. It has a growth-oriented multi cap portfolio with 63% of the corpus in large cap stocks. There are 80 stocks in the portfolio. The top 5 holdings constitute 21%. The top three sectors are finance, technology, and energy. DSP BR Tax Saver fund has offered 8.64% returns for the last one year as against the category average of 5.62%. The expense ratio is 2.62% and the portfolio turnover ratio is 58%.

FUND FLAVOUR

November 2013

In today’s era of high inflation, one cannot afford to put all his/her savings in fixed deposits / debt instruments as the returns from those assets will not even cover the rise in cost of living, not to mention earning returns on top of inflation. Thus, it is essential to have some part of savings in equities, and within that, Equity Linked Savings Scheme (ELSS) fund is the best option.

ELSS - one up on traditional tax-saving avenues

Going by its name, ELSS invests a majority of its corpus in equity and equity related products. An investment in ELSS comes with a lock-in period and has tax benefits attached to it. ELSS schemes are open-ended, that is, investors can subscribe to the fund on any day. NAV or the price of the fund is declared on every business day. Like all investment options, ELSS too comes with its share of advantages and disadvantages.

Advantages of ELSS

·       CRISIL Research, India’s largest independent and integrated research house believes that ELSS offered by mutual funds scores over other traditional tax saving products by offering higher inflation-adjusted returns. ELSS gave 26% and 22% annualized returns over three and ten years respectively vis-à-vis 8-9% offered by traditional tax saving instruments like PPF and NSC. ELSS is not only an attractive option to save tax but it also helps to create wealth in the long run. ELSS as a category has outperformed the benchmark S&P CNX 500 index across three and ten years. With the average inflation hovering at around 7% over the past three years, top ELSS funds analysed by CRISIL gave an inflation adjusted return of 14%, which is significantly higher than returns offered by the other tax saving products. Thus, investors who are willing to take a certain degree of market risk could look at ELSS to generate superior long-term returns.

·       There is no ceiling for investments in ELSS. However, investments in ELSS qualify for tax deductions under sec 80C of the income tax act subject to a maximum of Rs 100000 in a financial year whereas investments under normal mutual fund do not qualify for income tax deductions. Any dividend received or long term capital gain earned by the investor is tax free. Long term capital gain arises on selling units of mutual fund after one year of purchase. Since there is a lock-in period of 3 years, every investor will realize long term capital gain/loss on selling their holdings.

• PPF and NSC are popular tax savings instruments issued by the Government of India. Public provident fund (PPF) has a lock-in period of 15 years; National savings certificate has a lock-in period of 6 years. Main advantage of ELSS is its short lock-in period of 3 years only.

Disadvantages of ELSS

• Risk factor is very high compared to NSC and PPF. ELSS funds invest in stocks and carry the same risk as any other equity fund. In fact, the risk is greater because you cannot touch the investment before the three-year lock-in period.
• Premature withdrawal is not allowed but it is allowed in other instruments under some specific conditions.
• Tax benefits on investment in ELSS may soon be phased out with the introduction of Direct Tax Code.

The balancing act

However, investors need to be wary of the fact that ELSS funds typically invest in a mix of small, mid, and large cap and that the returns can be volatile. The investment should be more than five years for higher inflation adjusted returns. Further, investors must choose funds that have fared well in good and bad times. The minimum three-year lock-in period for ELSS provides the investment manager with a longer investment horizon and leads to a lower portfolio churn. This also leads to lower transaction costs for investors. Most AMCs offer an ELSS scheme and investors have 48 such schemes to choose from. In addition, investors can invest as low as Rs 500 through SIPs, and reap the benefits inherent in disciplined long-term investment.

The superiority of SIPs

Monthly investments on a pre specified date in mutual funds is possible through systematic investment plan (SIP). An investor has the option of investing monthly in equity linked savings schemes with a minimum investment of Rs 500. This type of investment is better suited to small investors who cannot invest a lump sum amount. SIP has the benefit of averaging out the cost of investors. As the amount of investment is fixed, the units purchases every month varies depending upon the NAV of the fund. At a higher NAV the investor gets fewer units and more number of units at a lower price thus averaging out the cost of investors. Instead of making a lump sum investment just for the sake of saving tax, advisors suggest investors to stagger their investments from the start of the financial year. This will help even out volatility of the stock market in the near term. For example, if you did a monthly SIP of Rs 2,500 for 12 months starting April 2008 in Franklin India Taxshield, you would have invested a total of Rs 30,000 by the end of the financial year. The value of that investment now is Rs 58,231, giving a return of 15.63%. However, if you had done a lump sum investment of Rs 30,000 on April 1, 2008, the value of that investment would be lower at Rs 47,022 today — giving an annualised return of 9.66%.

Scintillating asset growth…

Although ELSS funds were available from 1996, it is only in the past few years that the ELSS funds have become very popular with tax savers and investors alike. Prior to 2005, the assets in ELSS funds were around Rs. 500 crores but by January 2010, the assets in ELSS schemes grew close to Rs. 22,500 crores, a jump of close to 4400%, in just a matter of 4 years. Part of this spectacular growth is due to the stock market performance from 2004 to 2007; although the assets in the ELSS funds reduced in 2008, the market crash of 2008 did not deter the investors from investing in ELSS funds. Once the market recovered in 2009, by January 2010, the assets of ELSS funds reached close to Rs. 22,500 crores. This is much higher than Rs. 16,000+ crores of assets reached in December 2007, when the Indian stock markets were at an all time high. 

… subdued by mediocre performance

The performance of ELSS funds has been a cause for concern lately for investors. According to Value Research, a mutual fund tracking firm, the ELSS category has delivered a mere 1.28% in the last three years, and 4.13% in the last five years. Tax-planning mutual funds, or ELSS, as a category have lost 13.87% over the past year, as on October 28, 2013 according to Value Research, an independent mutual fund tracking firm. No wonder, many investors are not keen to invest in ELSS this year.

 

ELSS suits first time equity investors

ELSS has become the vehicle for most first-timers in equity investments. It is suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. Though there is no age to get started on an ELSS, it is good investment to have for those who are just starting their careers as it can help them shed their inhibition about investing in equities through mutual funds in a big way. The newly launched Rajiv Gandhi Equity Saving Scheme is best left untouched. It gives additional tax deduction to first-time investors who want to enter the equity market. Instead of taking this route, which will give them only 50% tax deduction, the ELSS funds are a better option.

… and is at the heart of financial planning framework

 

 

The most important rule of tax planning is that it is no different from financial planning. The Section 80C offers a wide range of options, each suited to a different need. Choose an option that fits into your overall financial plan, not because it offers good returns or your relative or friend is selling it. It is easier to identify the best option if you do not leave tax planning for the dying days of the financial year. You get a rough idea of how much you need to save at the beginning of the fiscal year. Allocate your Rs 1 lakh limit across different Sec 80C options as dictated by your financial goals, following the same principles of asset allocation that apply to other investments. Given that these goals are a good 15-20 years away, you can start a monthly SIP of Rs 5,000, thus aligning your tax-saving investment with a long-term financial goal.