FUND FULCRUM

November 2014

The mutual fund industry’s assets under management went up by 14% from Rs. 9.59 lakh crore in September 2014 to Rs. 10.95 lakh crore in October 2014 on the back of strong capital inflows and surge in equity markets. With the exception of two categories (overseas fund of funds and Gold ETFs), the industry saw positive inflows across all categories. Since the beginning of FY 2014-15, equity funds have seen positive inflows each consecutive month. So far, the industry has attracted inflows of nearly Rs.40,000 crore in April-October 2014. The BSE Sensex has shot up 24% during the same period. The AAUM of equity funds went up to Rs. 2.62 lakh crore due to mark to market gains and healthy inflows in existing schemes. Reflecting the positive sentiment among investors, equity funds saw an addition of 5.51 lakh folios (excluding ELSS). The total number of equity folios went up from 2.32 crore in April 2014 to 2.38 crore in October 2014. After three months of consecutive outflows, income funds saw net inflows of Rs. 15,446 crore. In September 2014, the category witnessed outflows of Rs. 10,567 crore. This reversal can be attributed to growing expectations of a rate cut in the RBI’s upcoming monetary policy announcement. A few fund houses had come out with gilt funds having maturity of close to 10 years in October 2014. In the debt category, liquid funds received the largest share of inflows in October 2014, receiving net inflows of more than Rs. 1 lakh crore. In September 2014, liquid funds witnessed net outflows of Rs. 67,318 crore. Typically, corporate investors pull out money in the last week of the quarter and invest in the first two weeks of the subsequent quarter. Lackluster performance of gold led investors to pull out money from gold ETFs. The category saw net outflows of Rs.38 crore in October 2014. However, other ETFs, which track the equity indices, received inflows of Rs.429 crore in October 2014. Overseas fund of funds saw net outflows of Rs.49 crore in October 2014. Last month, overseas FOFs witnessed net outflows of Rs.103 crore. There are 31 international funds in the industry which manage Rs. 2,856 crore. All in all, the industry saw net inflows of Rs.1.24 lakh crore on account of robust inflows in liquid funds, income funds, and equity funds.

Equity mutual funds added more than seven lakh investor accounts or folios in the first seven months of the current fiscal (2014-15) in view of the sharp rally in the stock market. Folios are numbers designated to individual investor accounts, though one investor can have multiple folios. According to Securities and Exchange Board of India data on investor accounts with 45 fund houses, number of equity folios rose to 2,99,17,974 in October 2014 from 2,91,80,922 at the end of the last fiscal (March 31, 2014), registering a gain of 7,37,052 folios during April-October period in 2014. The additions came at a time when the market was scaling new highs. The month of April 2014 saw the first rise in more than four years. Prior to that, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the market crashed due to the global financial crisis in late 2008. Since March 2009, it has seen a closure of 1.5 crore folios. The investor base reached its peak of 4.11 crore in March 2009, while it was 3.77 crore in March 2008. Strong rally in the equity market and the consequent rise in investors' interest led to a sharp increase in retail folios. Moreover, mutual funds industry reported net inflows of nearly Rs 34,000 crore in equity funds in the April-September period of the current fiscal (2014-15), which helped the industry grow its folio count. Overall, the industry retail folios surged to 3.97 crore as on October 31, 2014 from 3.95 crore at the end of March 2014.

Retail folios in the liquid fund category posted a record rise of 42,199 folios to end at 2.41 lakh folios in H1FY15 following an addition of 30,457 folios in the preceding six months. Retail folios in debt funds maintained the uptrend (since March 2009) in H1FY15 as well. The category added 4.29 lakh retail folios over the past six months, the highest since September 2012 and compared with the addition of 2.92 lakh folios in the preceding six months. All investor segments (retail, HNIs and institutions) continued to shy away from gilt funds due to flat interest rates amidst lack of monetary easing by the Reserve Bank of India (RBI). The category's folio base slipped 11% to 50,937 accounts. Gold exchange traded funds (ETFs) posted their third consecutive half-yearly decline in the overall folio count. The retail segment saw closure of 21,557 folios to end at 4.68 lakh folios in the period under review compared with closure of 35,103 folios in the preceding six months. Domestic gold prices (represented by the CRISIL Gold index) fell 5% in the six months ended September 2014.

Tenure-wise analysis of assets under management (AUM) across investor types and categories for the half year ended September 2014 showed that 64% of retail AUM stayed in equity mutual funds for more than two years, higher than 62% seen in the preceding six months, according to CRISIL. Of the Rs 1.72 lakh cr of retail investments in equity-oriented mutual funds, Rs 1.10 lakh cr was held for over 24 months. About 32% of HNIs, by AUM, stayed invested in equity mutual funds for more than two years, sharply lower than 51% seen in the preceding six months. Corporates continued to dominate mutual fund AUM with 47% share in September 2014 (Table1), down from 49% in March 2014. HNIs were the second biggest contributor with 28% share. The retail segment's share in total mutual fund AUM rose to 22% in the latest six months from 19% in the preceding six months.

Piquant Parade

The Ministry of Finance has appointed ICICI Prudential Mutual Fund to launch and manage the Specified Undertaking of Unit Trust of India (SUUTI) ETF. The SUUTI constitutes companies like Axis Bank, Larsen & Toubro (L&T), and Indian Tobacco Company (ITC). The government is planning to raise Rs.7000 crore by divesting its stake in these companies. Currently, the government holds stakes of 11.66% in Axis Bank, 8.8% in L&T and 11.27% in ITC worth nearly Rs. 60,000 crore. The Ministry of Finance has considered two parameters - quantitative and qualitative - for the selection of the fund house. While quantitative parameter evaluated the fund houses on the basis of a management fee it quoted, the qualitative parameter gauged ability and experience of fund houses to manage ETFs. The government has appointed ICICI Prudential Mutual Fund on the basis of a few parameters like capability and previous experience to manage ETFs and competitive management fees. Last month, the government floated ‘The Request for Proposal’ in order to appoint a fund house to launch and manage the divestment of SUUTI through the ETF route. Seven fund houses – UTI, SBI, ICICI Prudential, Birla Sun Life, Reliance, Kotak, and a consortium of Sundaram and Edelweiss had put their bids for the SUUTI ETF. Earlier in 2014, the finance ministry had given a mandate to Goldman Sachs AMC to launch and manage the central public sector enterprise (CPSE) ETF through which it had divested its stakes in 10 PSUs. The government had raised Rs. 3000 crore from this ETF.

Scripbox.com, the automated investment platform which helps investors manage their money the right way - announced the availability of a debt fund portfolio to meet short to medium term investing needs. This selection complements the existing scripbox portfolio of equity funds for long term investors. Debt mutual funds have long been considered an alternative to FDs but with over 3400 debt funds across 6 categories, selection of the right funds becomes extremely challenging even for professional investors. To remove this confusion, scripbox has used a scientific rule based method to recommend a portfolio of 2 debt funds which meet the criteria of consistent performance and high safety of capital. With this launch, scripbox is offering Indian investors the most reliable selection of mutual funds to invest in using its easy to use online investment platform. While most investors only compare returns, the scripbox method also assesses credit risk and volatility of returns. This aligns the selected portfolio with an investor's objective of balancing reasonable fixed income returns with safety of capital. With its sharp focus on selection, the scripbox debt fund portfolio is a straightforward, smart, and hassle free solution for investors to get better returns on their short to medium term (1-3 years) money.

Regulatory Rigmarole

AMFI has constituted an advisory committee comprising chief investment officers to form a consensus on taking a stand in company voting. The committee is headed by Chandresh Nigam, MD & CEO, Axis Mutual Fund. However, the final decision to vote in favour or against a company resolution would be the prerogative of the respective fund house. AMFI has formed this committee to discuss voting options before any crucial decision of company in order to protect the interests of minority shareholders. The opinion of the committee is not binding on the AMC. SEBI has tightened its vigilance to make sure that AMCs are exercising their voting rights to protect the interests of mutual fund investors. Earlier in 2014, SEBI had asked fund houses to share the rationale behind casting vote for or against any matter on their websites. In addition, AMCs are required to disclose their general policy of voting and the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies. AMCs are required to obtain a certificate from the auditor on the voting reports annually. This report has to be submitted to the trustees and published in the annual report and website of AMCs. SEBI had also asked the trustees and boards of AMCs to monitor and ensure that the votes cast by AMCs are prudent and adequate. Last year, a InGovern ‘Mutual Funds Pattern 2013 Analysis’ report showed that majority of fund houses had either voted in favour of proposals or had decided to largely abstain from voting in the resolution put forth by the investee companies. The report found that fund houses were passive or indifferent while voting at investee company shareholder meetings. In fact, two AMCs had not made any voting disclosure in FY 2012-13 since they completely abstained from voting exercise.

Following the Interim Budget announcement in 2014 to create one record for all financial assets of every individual, SEBI has instructed mutual fund houses, registrar and transfer agents (RTAs), and depositories to issue a unified consolidated account statement (CAS) for mutual funds and stock holdings from March 2015. The market regulator has asked fund houses, R&T agents and depositories to put in place a system to facilitate generation and dispatch of single CAS for investors having mutual fund investments and those holding demat accounts. Depositories are required to consolidate the details of stock holdings and mutual fund units of investors. The single CAS will be sent to investors within 10 working days from last date of the month. Depositories have been instructed to keep such information confidential. The consolidation will be done on the basis of PAN. While the CAS will be issued to the first account holder in case of multiple holdings, investors who have not made any investments in stocks will continue to receive CAS from fund houses as per the current practice.

SEBI has allowed small fund houses having net worth of less than Rs.50 crore to launch two new schemes a year till the time they meet the mandatory net worth requirement. However, such permission would be considered on a case to case basis, depending on such AMCs demonstrating that serious efforts are being made by them to meet the net worth requirements within the prescribed timelines. Earlier, SEBI had restricted a few fund houses from launching new schemes till they raise their net worth to Rs.50 crore. The regulator had given three years to these fund houses to increase their net worth. According to SEBI data as on February 2014, 19 AMCs have net worth of less than Rs.50 crore. 8 AMCs have net worth between Rs.50 crore to Rs.100 crore while 18 AMCs have net worth of more than Rs.100 crore. The net worth of all AMCs put together is Rs.8399 crore. SEBI had observed that 11 AMCs having net worth less than Rs. 25 crore have consistently remained below 1% of the total mutual fund industry AUM. Recently, Motilal Oswal and Religare Invesco had raised their net worth in order to comply with SEBI’s norm.

Retail participation in mutual funds from beyond the top 15 cities in the country has increased remarkably in the past 18 months, due to joint efforts made by the mutual fund houses and stock market regulator SEBI, according to AMFI. The mutual fund industry's assets under management (AUM) crossed Rs 1,07,000 crore from retail investors living in places beyond the top 15 cities as on October 31, 2014. It was a 33% growth over a 18-month period. As on March 31, 2013 the AUM was Rs 65,000 crore, according the Association of Mutual Funds in India. 

NFO NEST

November 2014

NFOs of various hues flood the market in the November 2014 NFONEST.

ICICI Prudential Capital Protection Oriented Fund – Series VII Plan B

Opens: November 5, 2014

Closes: November 19, 2014

ICICI Prudential Capital Protection Oriented Fund - Series VII - Plan B is a close ended capital protection oriented fund. The tenure of the fund is 1285 days. 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 provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the plan under the fund. The fund would allocate 70%-100% of assets in debt securities and money market instruments with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with medium to high risk profile. The benchmark Index is CRISIL MIP Blended Index. The fund managers are Vinay Sharma (equity portion), Aditya Pagaria and Rahul Goswami (debt portion) and Ashwin Jain (for investments in ADR / GDR and other foreign securities).

Franklin India Multi-Asset Solution Fund

Opens: November 7, 2014

Closes: November 21, 2014

Franklin India Multi-Asset Solution Fund is an open-ended fund that seeks to achieve capital appreciation and diversification through a mix of strategic and tactical allocation to various asset classes such as equity, debt, gold and cash. The fund will invest in existing schemes of Franklin Templeton and ETFs which have a long term performance track record. The fund simplifies the investment process for investors who currently have to invest in a range of asset classes to achieve their desired asset allocation. It makes the investment process much easier for investors on account of its dynamic asset allocation rebalancing feature. The fund will invest the equity component into Franklin India Bluechip Fund and/or Franklin India Prima Plus. The debt portion of the fund will be invested into Franklin India Short Term Income Plan and/or Franklin India Income Opportunities Fund. The money market allocation will be invested in Franklin India Treasury Management Account. The gold component of the fund will be invested in any of the domestic gold ETFs.

DSP BlackRock 3 Years Close Ended Equity Fund

Opens: November 7, 2014

Closes: November 21, 2014

DSP BlackRock 3 Years Close Ended Equity Fund will invest a minimum of 65% in equity and equity related securities of small, micro and mid-cap companies and up to 35% in debt, money market securities. The fund will use a combination of top-down and bottom-up analysis to identify sector and stock weightages in the portfolio. Benchmarked against CNX 500 Index, the fund will have a concentrated portfolio and invest primarily in the equity and equity related securities of companies which are valued at a reasonable price. The fund will be co-managed by Vinit Sambre and Laukik Bagwe. 

LIC Nomura Mutual Fund Diversified Equity Fund – Series 2

Opens: November 10, 2014

Closes: November 24, 2014

LIC Nomura MF Diversified Equity Fund - Series 2 is a close ended equity fund with a duration of 1100 days. The primary investment objective of the fund is to generate capital appreciation, from a portfolio that is substantially constituted of equity and equity related securities constituting S&P BSE 200 Index Companies. The fund may also invest a certain portion of its corpus in cash and cash equivalents, debt and money market instruments from time to time. The fund shall invest 80-100% in equity and equity related instruments constituted of companies in S&P BSE 200 index with high risk profile and up to 20% in cash and cash equivalents, debt and money market instruments with low risk profile. The benchmark Index for the fund is S&P BSE 200 Index. The fund managers are Nobutaka Kitajima and Ramnath Venkateswaran.

Birla Sunlife Equity Savings Fund

Opens: November 11, 2014

Closes: November 25, 2014

Birla Sun Life Equity Savings Fund is an open ended equity fund. The investment objective of the fund is to provide capital appreciation and income distribution to the investors by using a blend of equity derivatives strategies, arbitrage opportunities, and pure equity investments. The fund shall invest 65-80% in equity and equity related instruments including derivatives (Out of which: Cash-futures arbitrage: 20% - 60% and Net long equity exposure: 20% - 45%) and 20-35% in debt and money market instruments (including margin for derivatives) The benchmark index for the fund is S&P BSE 200 to the extent of 30% of portfolio, Crisil Short Term Bond Fund Index to the extent of 30% of the portfolio, and Crisil Liquid Fund Index to the extent of 40% of portfolio. The fund managers are Satyabrata Mohanty and Prasad Dhonde.

ICICI Prudential Multiple Yield Fund – Series 8 Plan C

Opens: November 11, 2014

Closes: November 25, 2014

ICICI Prudential Multiple Yield Fund - Series 8 - Plan C is a close ended income fund. The tenure of the plan is 1103 days from the date of allotment of units. The primary objective of the fund is to seek to generate returns 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. The fund will allocate 65% to 95% of assets in debt securities (including government securities) with low to medium risk profile. It would allocate up to 30% of assets in money market instruments, cash and cash equivalents with low to medium risk profile and it would allocate 5% to 35% of the assets in equity or equity related securities with medium to high risk profile. Of the investments in debt instruments, 84%-89% would be invested in AA rated non-convertible debentures. The benchmark index for the fund will be CRISIL MIP Blended Index. The fund is proposed to be listed on NSE. The fund managers are Rahul Goswami and Aditya Pagaria for debt portion, Vinay Sharma for equity portion, and Shalya Shah for ADRs/GDRs and other foreign securities.

BOI AXA Capital Protection Oriented Fund – Series2

Opens: November 13, 2014

Closes: November 27, 2014

BOI AXA Capital Protection Oriented Fund - Series 2 is a close-ended capital protection oriented fund. The tenure of the fund will be 37 months from the date of allotment. The investment objective of the fund is to generate income by investing in a portfolio of fixed income and money market instruments maturing on or before the maturity date of the fund. The fund will invest 75%-100% of assets in debt and money market securities with low to medium risk profile and invest up to 25% of assets in equity and equity related instruments with high risk profile. The benchmark index for the fund is CRISIL MIP Blended Fund Index. The fund managers are Alok Singh and Surabh Kataria.

Canara Robeco India Opportunities Fund

Opens: November 14, 2014

Closes: November 28, 2014

Canara Robeco India Opportunities Fund is a close ended equity fund. The tenure of the fund is 3 years (1095 days) from the date of allotment of units. The investment objective of the fund is to generate capital appreciation by investing predominantly in equity and equity related instruments of mid cap companies. The fund shall invest 55-90% in mid- and small cap equity and equity related instruments, 10-45% in large cap equity and equity related instruments, up to 5% in micro-cap equity and equity related instruments with high risk profile and up to 35% in debt and money market instruments with low risk profile. The benchmark Index for the fund is CNX Midcap. The fund manager will be Ravi Gopalakrishnan.

Sundaram World Brand Fund – Series 1

Opens: November 20, 2014

Closes: December 2, 2014

Sundaram Mutual Fund announced the launch of its five year close ended equity scheme called Sundaram World Brand Fund. The fund house plans to launch five series of this fund and the first series will open shortly. Benchmarked against MSCI ACWI Index, the fund will invest a minimum of 65% in overseas equities and up to 35% in domestic fixed income securities. For investing in international securities, Sundaram AMC has entered into an agreement with Sundaram AMC Singapore to act as its investment advisor. Geographically, over 70% of the assets will be invested in stocks listed in the US followed by 12% in Germany, and 8% in Japan. The fund would invest 43% in IT, 36% in consumer discretionary, 12% in consumer staples and the remaining 9% in other sectors. Unlike other overseas funds, this is not a fund of fund, as the fund will directly invest in overseas stocks. Thus, the fund would be treated as an equity fund. The only drawback of this fund is its five-year lock in period. To ensure liquidity, the fund would declare a dividend when the NAV hovers between Rs. 12 and Rs. 16.The fund will be managed by S Bharath. The fund house is planning to launch the second series in December 2014.

SBI Long Term Advantage Fund – Series 1

Opens: November 1, 2014

Closes: January 31, 2015

SBI Long Term Advantage Fund - Series I is a 10 year close ended equity linked savings scheme. The investment objective of the plan is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity related instruments of companies along with income tax benefit. The fund would invest 80%-100% of assets in equities, cumulative preference shares and fully convertible debentures and bonds of companies with high risk profile and invest up to 20% of assets in money market instruments with low to medium risk profile.  The benchmark Index for the fund is S&P BSE 500 Index. The fund manager is Dharmendra Grover.

HDFC Annual Interval Fund – Series II (3 Plans), SBI Equity MIP Fund, JP Morgan India Balanced Advantage Fund, Kotak NV 20 ETF, Motilal Oswal MOST Focused Long-term Fund, and UTI Capital Protection Oriented Fund – Series V are expected to be launched in the coming months.

GEM GAZE 

November 2014 

ELSS Funds are suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. New investors, who want to test the waters before jumping into equity mutual funds, will find this especially useful. Though there is no age to get started on an ELSS, it is a 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. A healthy dose of equities through the ELSS route gives the investor the extra edge he needs to beat inflation.

All the GEMs of the 2013 GEMGAZE have retained their esteemed GEM status in the 2014 GEMGAZE.

Magnum Taxgain Fund Gem

Mammoth in the making

SBI Magnum Taxgain is one of the oldest and largest tax-saving ELSS schemes in the country with an AUM of Rs. 4,930 crore. An interesting feature of the fund is its stock picking which is more inclined to companies that have disproportionately large market share, with 66% of the funds in large cap stocks. There are 45 stocks in the portfolio, with the top 5 holdings accounting for 29% of the portfolio. The top three sectors that the fund invests in are finance, technology, and energy. One-year return of the fund is 53.82% as against the category average of 52.88%. The expense ratio is 2.28% and the portfolio turnover ratio is 9%.

HDFC Tax Saver Fund Gem

Diversification pays

At Rs. 4681 crore, HDFC Tax Saver Fund is the second largest ELSS fund in the industry. Currently, large caps account for 66% of the portfolio. With 50 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 engineering. In the past one year, the fund has earned a return of 61.32% as against the category average of 52.88%. The expense ratio is 2.25% and turnover ratio is 37%. 

Canara Robeco Equity Tax Saver Fund Gem

Astute agility

The Rs. 851 crore Canara Robeco Equity Tax Saver Fund, has been pretty successful in utilising the agility that a small fund offers by spotting opportunities and capitalising on them. Allocation to the top 5 holdings (26%) 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. There are 53 stocks in the portfolio with 64% allocated to largecap stocks. 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 47.41 % as against the category average of 52.88 %. The expense ratio is 2.59% and portfolio turnover ratio is 45%. 

Religare Invesco Tax Plan Gem

Consistent returns through viable strategy

With a corpus size of Rs. 202 crore, Religare Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. The fund invests across market capitalisation and sectors and spreads its assets over 45 stocks without being overly diversified and the top 5 holdings constitute 29%. The top three sectors are finance, technology, and services. Even though the fund currently has a large cap bias with 54% allocation, it has not been hesitant about being heavily invested in smaller companies. In the past too, the mid-cap and small-cap allocation have been high. Its relatively small size makes an effective mid-cap strategy viable. The one-year return is 55.76% as against the category average of 52.88%. Despite its relatively short history, the fund has consistently delivered returns for the investors. Over one, three, and five year time-frames, the fund has beaten the BSE 100 by a margin of two to five percentage points. In the rollercoaster ride the market has taken in the past five years, the fund performed well across market cycles. Stock picking has been the key for success of this fund. The expense ratio is 2.91% and the portfolio turnover ratio is 20%.

DSPBR Tax Saver Fund Gem

Growth-oriented diversification

DSPBR Tax Saver Fund has a fund corpus of around Rs 1015 crore. It has a growth-oriented multi cap portfolio with 61% of the corpus in large cap stocks. There are 86 stocks in the portfolio. The top 5 holdings constitute 22%. The top three sectors are finance, technology, and automobile. DSP BR Tax Saver fund has offered 55.08% returns for the last one year as against the category average of 52.88%. The expense ratio is 2.66% and the portfolio turnover ratio is 50%.

FUND FLAVOUR

November 2014

A fund qualifies to be an Equity Linked Savings Scheme (ELSS) if it invests more than 65% in equity, has a three-year lock-in on investments, and has the necessary approval from the tax authorities to qualify as a tax-planning scheme. This unique fund category is the only one that is open to retail investors and HUFs, are open-ended, and have equity exposure.

Ups and downs of ELSS inflows…

There is a distinct seasonality in the inflows in ELSS. Every year, in the months of January, February, and March, one can see a spike – with the month of March being easily identifiable. The last quarter contributes to around 50% of the entire year’s investments. Approximately 25% of the entire year’s inflows in ELSS come in the month of March. According to AMFI's data, it has been seen that for the financial year 2013-14, in April 2013 only 6% of collection was done, whereas in the month of March 2014, 28% of sales took place for the ELSS category. Thus, we can say that most of them start their tax saving at the end of the financial year instead of at the start of the financial year.

… ELSS SIP – the answer

Incidentally, investment in a scheme like ELSS should be done through systematic investing, or through investing a fixed amount every month out of the monthly savings. The discipline of regular saving helps one through a principle called “Rupee cost averaging”. This approach of investing a fixed sum every month helps one buy more units when they are cheap and fewer when they are costly. This brings the average cost of purchase down.

On the brighter side

Shortest lock-in

All tax-saving investments have lock-in periods ranging from three to 15 years. ELSS funds have a lock-in period of three years, the shortest among all Section 80C investment options. While this reduces liquidity and prevents the investor from making changes, it can be a blessing in disguise. It also means that redemptions are not a worry for the fund manager and he can take long-term investment decisions, which generally prove beneficial for the fund. For the investors who take the SIP route, each monthly instalment is treated as a separate investment and gets locked in for three years. So, the SIP started in July 2014 will be eligible for withdrawal in July 2017. Similarly, the SIP invested in August 2014 will be open for withdrawal only in August 2017. Further, do not make the mistake of opting for the dividend reinvestment plan, under which the dividend payout is reinvested to buy more units of the scheme. Every time this happens, the new units get locked in for another three years. 

Tax advantage 

ELSS funds fall under the exempt-exempt-exempt (EEE) category. Investments get tax deduction under Section 80C. So you do not have to pay tax on the amount invested in the ELSS fund. The capital gains generated by the fund are also exempt from tax as the investments are not withdrawn. Finally, withdrawals are also tax-free because there is no tax payable on long-term capital gains from equity-oriented mutual funds. Since the holding period necessarily exceeds one year, there is no capital gains tax. The Employee Provident Fund and the Public Provident Fund are the only other investment options that enjoy the EEE tax treatment. From 2014-15, this fund has another attraction added to its already long list; the investment limit in this fund which qualifies for tax benefits under Section 80C of the Income Tax Act, 1961 has been increased by Rs. 50,000 to Rs. 1.5 lakh, which is deductible from taxable income.

Affordable investment threshold

Most equity funds have a minimum investment limit of Rs 5,000, but ELSS funds have a lower threshold of Rs 500. New investors who want to test the waters before jumping in will find this especially useful. These funds also offer a greater flexibility to investors. Unlike an insurance plan or a unit-linked insurance plan (ULIP), you do not have to commit multi-year investments. Even a one-time investment of Rs 500 can be held till perpetuity. In the PPF, the investor must make at least one contribution in a year or pay a penalty. However, there is no such compulsion in ELSS funds.

These funds provide equity exposure and are an alternative to other tax saving instruments like NSC, PPF, and fixed deposits. This is the only pure play equity investment option available compared to the otherwise fixed return, fixed tenure options. Considering the Finance Minister's budget speech, there is no committed deadline for introduction of the long-awaited new tax code or the DTC. The future of ELSS funds is still bright.

On the flip side

Since these funds invest 65% in equity, there is some element of risk. Moderate risk and high-risk investors can consider this as a tax saving investment option. In addition, the past performance may or may not repeat in future. Hence investors should consider this risk element while investing in such funds. ELSS funds are essentially diversified equity funds and carry the same risks. In fact, the risk is higher in ELSS funds because you cannot exit before three years. 

Consistent performer

However, the average ELSS fund has performed better than the average diversified equity fund in the past few years. The average returns of the ELSS category over different time horizons are 35.02%, 16.22%, 11.02%, 12.91%, and 12.91% over the 1-year, 3-year, 5-year, 10-year, and 15-year horizons. While the ELSS category has given 15.2% annualized returns, the diversified funds have given 14.3%. This is partly because a large number of equity diversified funds pull down the average returns. However, not all ELSS funds have performed so well. While the best performing ELSS fund has given 21.7% annualized return in the past five years, the worst performer has given only 3.8%. So, choosing the right fund is crucial. It is enough to hold 1-2 tax-saving equity funds. As you would also be holding a few traditional diversified equity funds, having more ELSS funds will only duplicate your portfolio.

Ideal long-term investment

Ideally, you should choose a fund for investment purposes based on different investment time frames and fund corpuses. In many cases investors tend to exit an ELSS investment once the lock in period is complete because they suffer notional losses due to market fluctuation or due to poor selection of funds. While the three-year milestone can be used to review the performance of an ELSS investment, it should not be used as an automatic exit point. Holding ELSS for a period of 10-15 years, as the data clearly shows, is better than stepping out at the end of 3 years. It is not only more fruitful for investors in terms of returns but it reduces the probability of facing negative returns as well. A minimum of 10-15 years is an ideal horizon for any ELSS investments, mainly because it gives the fund manager the room to take a long-term view on the market and invest accordingly. If we are comfortable with PPF and insurance products for 10-15 years, why not with ELSS? 

Equity can be a risky investment if you are investing for a short period of time, but with time on your side, equity is extremely rewarding. So, why not look at equity as a part of your long-term corpus? This asset class has proven to be the best performer over the long term. The icing on the cake is that no tax is levied on the long-term capital gains from equity funds and dividends are tax-free too. ELSS is undoubtedly one of the best tax saving products available in India.