FUND FULCRUM

November 2017

With rising equity markets, the average assets under management (AAUM) of the mutual fund industry reached close to Rs.22 lakh crore in October 2017. AMFI’s latest data shows that AAUM of the mutual fund industry has reached Rs.21.79 lakh crore in October 2017. The average AUM of the mutual fund industry has increased from Rs.19.92 lakh crore in June 2017 indicating a growth of 9% in a quarter. However, the monthly AUM of the industry stood at Rs.21.41 lakh crore in October 2017. While AAUM is the average assets of the entire month and is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month. The growth has come largely because of higher inflows in balanced funds, arbitrage funds and equity funds through SIPs. AMFI data shows that the monthly inflows in mutual funds through SIP reached an all-time high of Rs.5,621 crore. Data shows that the industry mopped up close to Rs.35,000 crore in the last seven months through SIPs. Moreover, the mutual fund industry had added about 8.86 lakh SIP accounts each month on an average during the FY 2017-18, with an average SIP ticket size of about Rs.3,250. Overall, AMFI data shows that the industry has received net inflows of Rs.23,574 crore in equity funds including pure equity funds, balanced, ELSS and equity ETFs in October. The total equity AUM has increased by Rs.66,000 crore to reach a record high at Rs.9.16 lakh crore in October 2017. The industry’s AUM had crossed the milestone of Rs.10 lakh crore for the first time in May 2014 and in a short span of a little over three years, the AUM size has doubled to Rs.20 lakh crore. The total number of folios as on October, 2017 stood at 6.32 crore. 

SEBI’s latest data shows that the Rs. 21.45 lakh crore mutual fund industry has added 11 lakh new retail folios in October 2017. A rough calculation indicates that the industry has added an average of 59,000 folios per day in the month of October 2017. As a result, the total folio count has reached over 6.31 crore in October 2017. For the last three months, the industry had constantly added over 60,000 folios per day on an average. However, last month, the industry witnessed a slight decrease in retail folio count. The decline in the quantum of new folios is largely due to the festive season as investors were more inclined to buy gold and other physical assets. Among mutual fund categories, equity funds have added over 10.26 lakh folios last month including pure equity, balanced and ELSS. Thanks to the market rally, pure equity funds have attracted 7 lakh investors increasing the folio count from 3.67 crore in September 2017 to 3.74 crore in October 2017. At the same time, equity funds saw an inflow of Rs.15,218 crore, shows the latest AMFI data. Also, AUM of equity funds stood at Rs. 6.32 crore in October. ELSS funds witnessed an addition of around 92,000 mutual fund folios and received net inflows of close to Rs. 784 crore in October 2017. Balanced funds continued the positive momentum by adding 1.85 lakh folios. The category received net inflows of Rs. 5,897 crore in October 2017.

According to the Association of Mutual Funds in India (AMFI) data, equity funds received an inflow of Rs 2.86 lakh crore from November 2016 to October 2017. Prior to that, such funds had registered inflows of Rs 1.5 lakh crore between October 2016 and December 2015. Along with that optimism of investors, demonetisation actually helped the industry to attract more investments. We have seen Rs 2.86 lakh crore coming into the mutual funds but we have also seen some redemptions. After taking into account redemptions, we have a net inflow of Rs 1.35 lakh crore. While overall assets under management (AUM) rose 32% since November 2016, the equity AUM grew by 46% after the note ban. Overall, the asset base of the mutual fund industry, comprising 42 players, reached an all-time high of Rs 21.41 lakh crore in October 2016, while that of equity AUM was over Rs 6.32 lakh crore. The traction in inflow of equity funds could be attributed to several factors. One, post demonetisation, there has been a clear increase in money coming into regulated market products such as mutual funds. Secondly, a slash in fixed deposit rates has seen retail money coming into equity markets through the mutual fund route. Money from unwinding of deposits may also have entered mutual funds. Third, with SIPs as a way of investing picking up among individual investors, equity funds have seen a steady increase in inflows as retail money, unlike institutional money, tends to be more sticky and steady. Systematic investment plans (SIPs), which have been the preferred route for retail investors to invest in mutual funds as it helps them reduce market timing risk, saw monthly collections growing to Rs 5,621 crore last month from Rs 3,434 crore in October 2016. The asset base of B-15 cities currently account for 17.7% of the overall industry AUM, up from 17% in Oct 2016 prior to demonetisation. B-15 cities have been witnessing a lot of activity around investor awareness and demonetisation was a much needed shot in the arm to help spur investments from smaller centres.

Piquant Parade

After a foray into the life insurance business and setting up of a NBFC subsidiary, Kerala-based Federal Bank is now looking at the mutual fund industry for further expansion of its operational domain. The bank is also in the process of divesting 26% stake in the fully-owned NBFC arm, Fedfina, to a strategic investor to raise capital for the subsidiary. Fedfina, is in the distribution business and also in the underwriting of loans for which it has generated a loan book of Rs 1,250 crore. The loan book of Fedfina is expected to double for which capital is needed. The equity divestment is towards that requirement and the strategic investor would be finalised by the end of the fiscal. Regarding the banking operations, equal stress is being given to corporate, MSME and retail loans. The bank's gross NPA level has been coming down over the last three years and stood at 2.3% at present. Post-demonetisation, digital transactions of the bank increased from 48% to 63%. The bank's business size stood at Rs 1.85 lakh crore comprising both deposits and advance at Rs 1 lakh crore and Rs 85,000 crore, respectively.

Punjab National Bank has said that the company will sell its entire stake in Principal PNB Asset Management Company. In fact, the Principal group has exercised call option to buy the entire stake in the company. Consequent upon the exercise of Call Option by the Principal Group, Board in its meeting held on 02.11.2017 has approved to offload its entire stake in Principal PNB Asset Management Company and Principal Trustee Company Pvt Ltd to the Principal group. Principal Mutual Fund manages AUM of Rs.5826 crore as on September 2017.

Peerless Mutual Fund has been renamed as Essel Mutual Fund with effect from November 1, 2017. Earlier in August 2017, Essel Finance had got the Securities and Exchange Board of India's approval to acquire Peerless Funds Management. Subsequently, the name of the Asset Management Company has been changed from 'Peerless Funds Management Co Limited' to 'Essel Finance AMC Limited’ with effect from October 24, 2017. In addition, the name of the trustee company has been changed from 'Peerless Trust Management' to 'Essel MF Trustee' with effect from October 30, 2017. Consequently, scheme names with prefix 'Peerless' has been changed to 'Essel'.

Canara Robeco Mutual Fund has allowed its mutual fund investors to use MF Utilities India's MF Utility portal for transactions in addition to the existing platforms. MF Utility is a 'transaction aggregator portal' and a shared service initiative of various asset management companies in India, wherein it enables the investors to transact in multiple schemes across fund houses. To use the portal, Canara Robeco Mutual Fund has signed an agreement with MF Utility India. Unit holders availing MF Utility can either transact electronically or physically in the authorised points of service approved by MF Utility India.

While Reliance Nippon Life AMC became the first fund house to go public in two decades, other fund houses such as ICICI, HDFC and UTI have been reportedly launching their IPOs soon. Listing of an asset management company has many advantages for both investors and companies.  Listing of an AMC provides retail investors access to a new sector. It makes the AMC business transparent for investors and attracts global investors. Listing of an AMC increases the accountability of the asset management company. Another possible reason could be retention of talent. Globally many companies use ESOP route to retain key employees. Going forward, the focus of the industry will move towards more profitable growth. Mergers and acquisition will take place based on profitability of the fund house instead of AUM. Investors will look at track record of profits. Public companies will have to focus on profitability to live up to the investor expectations.

Regulatory Rigmarole

The Association of Mutual Funds in India has sent an addendum to mutual funds for making Aadhaar mandatory for mutual fund investments with effect from January 1, 2018. On October 23, AMFI in an e-mail communication directed that mutual funds will not be allowed to open any new folios without obtaining customers' Aadhaar numbers. However, fund houses can allow investors to invest in mutual funds without furnishing Aadhaar details at their discretion; they will have to update such details before December 31, 2017. AMFI has also directed fund houses to ensure linking of Aadhaar details with existing folios before December 31, 2017. AMFI has asked fund houses to freeze non-Aadhaar compliant accounts with effect from January 2018. This means, non-Aadhaar compliant investors cannot execute fresh mutual fund transactions. This comes in the wake of the recent amendment in the Prevention of Money Laundering Act (PMLA) Rules, 2017. Earlier, the Finance Ministry had directed fund houses to link the Aadhaar number with the mutual fund folios before December 31, 2017. Investors can link their Aadhaar number with mutual fund folios through R&T agents such as CAMS and Karvy.

AMFI is likely to approach SEBI requesting modification of certain regulations of the scheme consolidation guidelines. Among other things, AMFI wants the market regulator to modify norms related to market capitalization, Macaulay duration and inclusion of gold as an asset class in the multi asset funds. Last month, SEBI had come out with uniform definitions for fund categories to reduce confusion among investors and expedite scheme consolidation. SEBI had defined large cap stocks as the 1st to 100th companies in terms of full market capitalization. While mid cap stocks, comprise 101st to 250th companies, small cap stocks consist of beyond 250th companies in terms of full market capitalization. On debt funds, AMFI will request the market regulator to consider modified duration instead of Macaulay duration. “Duration signifies risk. Longer the duration higher the risk. Since modified duration measures the price sensitivity of a bond due to change in the yield to maturity, it is a better measurement of interest rate risks. On the other hand, Macaulay duration calculates weighted average of maturity before the cash flows on bond starts and hence it may understate such risks. Currently, most fund houses consider modified duration to measure interest rate risks. Another key aspect of the circular is inclusion of gold in multi asset funds. SEBI has asked fund houses to have exposure to at least three asset classes in multi asset allocation funds. Apart from equity and debt, there are commodities like gold where a fund manager can invest in. Since, our fund managers do not have conviction on the performance of gold, they are not willing to take exposure to such an asset class.

Mutual funds are growing at a rate of 15% annually in the country. Indian mutual fund industry is in a growth phase with investors willing to test equity mutual funds. The Systematic Investment Plan (SIP) is gaining immense popularity among investors as an efficient tool for regular and disciplined investments. With SIP, one need not worry about market volatility or timing of market

NFONEST

November 2017

Asset mobilisation through the new fund offer (NFO) route has hit a nine-year high in 2017. The mutual fund industry launched a total of 47 NFOs during the first 10 months of the year, to mop up a cumulative Rs 13,500 crore. The average NFO size, too, has increased to a nine-year high of Rs 288 crore. The amount raised this year is still a fraction of what it used to be during the bull run of 2005-08. The annual mop-up during those four years was an average Rs 28,000 crore. Currently, investors prefer existing funds with a reasonable performance track record over new scheme launches and the trend is expected to continue. It is quite evident, as equity schemes got inflows of Rs 1.16 lakh crore so far in 2017, of which equity NFOs contributed a mere 12 per cent. Fund houses that do not have existing schemes in any of the product categories will only launch NFOs. 

NFOs of various hues adorn the November 2017 NFONEST.

HDFC Housing Opportunities Fund – Series 1

Opens: November 16, 2017

Closes: November 30, 2017

HDFC Mutual Fund has launched HDFC Housing Opportunities Fund - Series 1. The close-ended thematic equity fund will allocate at least 80 percent of its assets in equity and equity related instruments of entities engaged in and/or expected to benefit from the growth in housing and its allied business activities. The fund house will also invest up to 20 percent in equity shares of companies other than in housing and its allied business activities or in debt and money market instruments. The scheme also has the provision to invest up to 10 percent in units issued by Real Estate Investment Trusts or REITs & Infrastructure Investment Trusts InvITs. Though the underlying theme is housing, the fund is not a sectoral fund as it does not play on just one sector. The fund will invest in multiple sectors such as banks, NBFCs, engineering companies, steel companies and other consumer discretionary companies. In addition, the close end structure ensures that investors will remain invested at least for three years. The fund is benchmarked against India Housing and Allied Businesses Index. The Fund Managers are Mr. Srinivas Rao Ravuri and Mr. Rakesh Vyas.

DSP BlackRock A.C.E Fund – Series 1

Opens: November 17, 2017

Closes: December 1, 2017

DSP BlackRock Mutual Fund has launched DSP BlackRock ACE Fund (Analyst’s Conviction Equalized) Series 1. The 37-month close-ended multi-cap fund will allocate at least 80 percent of its asset in equity and equity-related instruments including derivatives, while up to 20 percent will be deployed in debt and money market instruments. The scheme portfolio will consist of 45-55 high conviction stocks across sectors and market capitalisations. The scheme will avoid sector and stock allocation bias. It will do so by having sectoral allocation in line with NIFTY 500 and equal weights for all stocks within a sector. Stock weights will be rebalanced quarterly and stock inclusions/exclusions will be done real-time. The Benchmark index of the fund is Nifty 500 Index. The Fund Manager is M. Suryanarayanan.

UTI Focused Fund – Series V

Opens: November 20, 2017

Closes: December 4, 2017

UTI Mutual Fund has launched UTI Focused Equity Fund Series V (1102 days), a closed ended equity scheme which primarily aims to generate long term capital appreciation by investing predominantly in equity and equity related securities of listed companies. The scheme will without any capitalization bias endeavor to invest in either growth stocks or value stocks or both. The scheme will normally hold up to 30 stocks in the portfolio. The Benchmark index of the fund is S&P BSE 100 Index. The Fund Manager is Mr. Vetri Subramaniam.

BOI AXA Midcap Tax Fund – Series 1

Opens: November 10, 2017

Closes: February 9, 2018

BOI AXA Mutual Fund has launched the BOI AXA Mid Cap Tax Fund Series 1, a close ended ELSS scheme with a tenure of 3650 days. The investment objective of the scheme is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related securities of midcap companies along with income tax benefit. The fund is benchmarked against Nifty Free Float Midcap 100. The Fund Manager is Mr. Alok Singh.

ICICI Prudential Multiple Yield Fund – Series 14, Sundaram Capital Protection Oriented Fund – Series 19 & 20, ICICI Prudential Growth Fund – Series 9 to 11, ICICI Prudential Capital Protection Oriented Fund – Series XIII, SBI Long Term Advantage Fund – Series V & VI and ICICI Prudential Long Term Wealth Enhancement Fund are expected to be launched in the coming months.

GEMGAZE

November 2017

The consistent performance of all five funds in the November 2016 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the November 2017 GEMGAZE.

Birla Sun Life Tax Plan Gem

Launched in 1999, the Rs. 633 crore Birla Sun Life Tax Plan is one of the oldest ELSS funds in the industry. Currently, large caps account for 39% of the portfolio. Portfolio allocations show the fund to be more small and mid-cap oriented than its peers, with a 61.37% allocation to small and mid-cap stocks. With 53 stocks and the top 5 holdings accounting for 32.8%, the fund looks well-diversified. The fund invests 47.92% in the top three sectors, i.e. automobile, finance and services. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays and offers superior growth opportunities.  After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. In spite of getting hit in the bear market situations a few years ago, it maintained a consistent growth. Since inception, this mutual fund has managed to give a very impressive return of 20.72% along with displaying a very consistent performance. In the past one year, the fund has earned a return of 27.89% as against the category average of 24.96%.  The expense ratio is 2.57% and turnover ratio is 62%.

Franklin India Taxshield Fund Gem

Launched in April 1999, the Rs. 3,367 crore Franklin India Taxshield Fund is one of the oldest ELSS funds in the industry with a proven track record in bull and bear phases. This ELSS fund’s strategy has been to buy quality large caps or emerging large caps at a reasonable price, even in a category crowded with multi-cap funds. Currently, large caps account for 81% of the portfolio. A large-cap oriented fund with a bottom-up investment strategy, this fund always stays fully-invested. The most distinctive feature of the fund's performance history is its ability to do better than its peers when markets crash. It fell only 15.19% as compared to the category average of 23.82% in 2011. But in the next year it slightly lagged behind its peers in terms of performance. The fund's long term returns are attractive, with a trailing five year return of 21.48% and it is ahead of its benchmark. Globally, Franklin Templeton is known for its stock selection. The Franklin India Taxshield Fund adopts the value investment philosophy. The fund waits for attractive price before investing in a share. The fund focuses on big companies which have potential to grow the business. The fund is backed by a strong research team. Anand Radhakrishan’s disciplined investment approach and a strategy that jelled well with his skill-sets has yielded desired results for this fund under his watch from April 2007 to April 2016. However, the fund went through some fundamental changes last year such as change in the manager and investment strategy. It is now helmed by Lakshmikanth Reddy, who joined the fund on May 2016 and has been managing this fund since then. Although R. Janakiraman is the named comanager here, Reddy is the primary manager. The change in the fund’s strategy is significant, too. While earlier it had a more definite mandate of investing around 70% in large-cap stocks and 30% in small/mid-cap stocks, it is now managed with a flexicap approach, which enables the manager to invest without paying heed to the benchmark index, market cap, or any specific style of investing. The change in the strategy is largely to align it with Reddy's skill-sets and to capture wider range of investment opportunities in the fund. Although the investment team has a reasonably good track record in running flexicap strategies, which is positive, it should be noted that it will also change the fund’s risk/reward profile going ahead. Further, the changes here have made the fund’s past track record less relevant. With 60 stocks and the top 5 holdings accounting for 26.52%, the fund looks well diversified. The fund invests 54.96% in the top three sectors, i.e. finance, automobile, and technology. Since inception the fund has given returns of around 25%. In the past one year, the fund has earned a return of 18.19% as against the category average of 24.96%. The expense ratio is 2.37% and turnover ratio is 26%. 

ICICI Prudential Long-term Equity Fund Gem

At Rs. 4753 crore, ICICI Prudential Long-term Equity Fund is one of the largest ELSS funds in the industry. Currently, large caps account for 55% of the portfolio. With 49 stocks and the top 5 holdings accounting for 22.13%, the fund looks well diversified. The fund invests 52.21% in the top three sectors, i.e. finance, energy and healthcare. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on cheaper valuation and reasonable growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. A fund which has outpaced its benchmark over not one but three different market cycles, it has beaten its benchmark in 13 of the last 15 years. This is a rare ELSS fund that has managed to stay one step ahead of the benchmark on a trailing one-, three-, five- and ten-year basis, while also beating the category over these periods. The fund's investment strategy typically delivers outsized returns in the beginning stages of a bull market when sector rotation is in vogue. It trails when markets are overheated. It also works well in containing losses when bears are in control. The value style of stock-picking has suffered setbacks in the last five years but seems to be back on the saddle in the last one year or so. In the past one year, the fund has earned a return of 14.48% as against the category average of 24.96%. The expense ratio is 2.32% and turnover ratio is 181%. 

Invesco India Tax Plan Gem

With a corpus size of Rs. 481 crore, Invesco India 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 35 stocks without being overly diversified and the top 5 holdings constitute 37.14%. 57.03% of the assets are invested in the top three sectors, finance, automobile, and energy. Even though the fund currently has a large cap bias with 82% 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 23.7% as against the category average of 24.96%. The year-to-year returns of this fund show it to be equally good at navigating both bull and bear markets, which is a hallmark of this fund. It managed to contain downside to levels much lower than its benchmark during 2008 and 2011 and has outpaced it by big margins both in 2010 and 2014. The last one year has seen the fund outpace its benchmark, but it slightly lagged behind its category. This could be due to its higher large-cap tilt in a category that is largely multi-cap-focused. This fund is a good choice for investors who are looking for a conservative approach to tax planning. Despite its relatively short history, the fund has consistently delivered returns for the investors. A fund that has managed to beat its benchmark through markets ups and downs in seven out of the eight years since launch, the fund prefers quality businesses with healthy growth prospects. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. Stock picking has been the key for success of this fund. The expense ratio is 2.47% and the portfolio turnover ratio is 43%.

DSPBR Tax Saver Fund Gem

Launched in 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 3216 crore. It has a growth-oriented multi cap portfolio with 73% of the corpus in large cap stocks. There are 68 stocks in the portfolio. The top 5 holdings constitute 21.24%.56.16% of the assets are invested in the top three sectors, finance, energy and construction. This fund has outperformed its benchmark in eight out of nine years since launch and its peers in seven of those years. The fund is not wedded to any particular style and follows a diversified approach to select stocks. Though multi-cap by mandate, the fund has been quite large-cap stock oriented in the last five years. The fund also takes tactical calls to capitalise on market trends and opportunities. The fund's margin of outperformance relative to the category and benchmark has widened in the last one year to over 6 percentage points. On a three- and five-year basis, its annualised returns are over 7 percentage points and 3 percentage points ahead of the benchmark and category, respectively. It is creditable that this has been managed with a distinct large-cap tilt relative to the category. The track record suggests that the fund has proved better at navigating bull runs and volatile phases in the market than bear phases. In 2008 and 2011, the fund lost slightly more than the category. It has delivered sizeable outperformance in 2012 and 2016. However, as the fund has seen a change in manager in 2015 and also adopted a higher allocation to large-cap stocks, past performance may not be a great guide to the future. DSP BR Tax Saver fund has offered 20.55% returns for the last one year as against the category average of 24.96%. The expense ratio is 2.51% and the portfolio turnover ratio is 84%.

FUND FLAVOUR

November 2017

What are ELSS Mutual Funds?

·                     ELSS (Equity Linked Savings Scheme) or Tax Saving Mutual Funds are the special funds which are meant for the purpose of tax saving under Sec.80 C of IT Act.

·                     Lock-in period of ELSS Funds is 3 years. This is the lowest lock-in period among all tax saving instruments you invest. However, each investment (monthly SIP) is considered as fresh investment. Hence, each investment or monthly SIP must complete 3 years for liquidating. Let us say, you started the monthly SIP on January 1, 2017, then the first SIP will be eligible for withdrawal after the completion of 3 years, i.e., after January 1, 2020. Similarly, February 1, 2017 SIP will be eligible for withdrawal after February 1, 2020. You have to wait for the completion of the fourth-year to completely withdraw the amount.

·                     ELSS falls under EEE tax rule (Exempt-Exempt-Exempt). There will be no tax during investment, no tax on whatever you earn and no tax at the time of withdrawal. This means the dividend declared from such funds are also tax-free in the hands of investors.

·                     The monthly investment required is as low as Rs.500. There is no maximum limit. But the maximum tax benefit under Sec.80C is Rs.1.50,000 as of now.

The most efficient tax-saving instrument…

Capital Appreciation - Like other equity mutual fund schemes, these mutual funds too are optimized for the highest returns possible. Just start an SIP in the right fund and rest assured that you grow your wealth over long term even without any significant effort on your part.

Tax Efficient - When compared with any other diversified equity mutual fund, the taxation on the gains are the same. So, what makes ELSS different from any other diversified mutual funds? You can invest up to Rs 1,50,000 in an ELSS and get that as a tax deduction under Section 80C in a financial year. When compared to other popular tax saving instruments such as Tax Saving Fixed Deposits or PPF, ELSS is definitely better. Not only does an ELSS reap higher returns, long-term gains from an ELSS are absolutely tax free just like that of PPF. Moreover, both the dividend incomes and capital gains earned from ELSS is tax free.

Shorter Lock-In Period - This is what makes ELSS better than all other investment options.
While your tax saving investments in PPF is locked in for 15 years, NSC for 6 years and tax saving bank fixed deposits for 5 years, your investments in ELSS is locked in for just 3 years. So, if you are looking for tax benefits along with higher return potential, but do not want to commit your money for very long period of 5 to 15 years, ELSS is something you should look for.

Efficient Fund Management - Unlike in a term deposit or a NSC, where you put your money in and the issuer just lends it out, while paying you a nominal return; a mutual fund is geared to grow your investment in a much more efficient way. Why? Because a mutual fund is expected to be managed by professional fund managers. They invest with an aim to make higher gains for their investors. Investing in a mutual fund is risky per se. But if you invest in the RIGHT mutual fund, you would reap much higher gain than you can probably expect from a fixed deposit, PPF account or savings certificate. 

…with rich returns

ELSS Funds have the potential to offer superior returns over a long period since they invest in stocks. ELSS Funds are managed with a multi-cap mandate and thus feature very wide variations in their style and market-cap orientation. This explains why the return divergence in the category is so high. Over the last ten years (as of March 16, 2017), the CAGR of the best-performing ELSS fund (Invesco India Tax Plan) was 16.54%, but that of the bottom one (Escorts Tax Plan) was 7.09%. Over the last five years, the category has delivered a decent 12.42% CAGR, helped by good performance from the mid- and small-cap pack from a low base. As the category tends to be quite volatile (thanks to the smaller stock allocations), SIP returns for the last five years, at 17.47%, are nearly the same as lump-sum returns. CRISIL’s rolling returns analysis shows that even though ELSS (represented by CRISIL-AMFI ELSS Fund performance index) have returned 24% CAGR, on an average, for a three-year holding period, investors can face the risk of short-term volatility. For instance, the rolling three-year period analysis shows that investors can face capital erosion (minimum returns of -11%) and high volatility (represented by standard deviation) of 20%. These risks reduce as investors increase their investment horizon to the long term, thus deriving optimum benefits. For instance, ELSS Funds have given 10-year rolling returns of 19% CAGR, on an average, with volatility reduced to 6% and minimum returns of 10%. This is still a fail-safe higher yield versus long-term inflation of around 7% and 8% by traditional instruments. Also, this is in sync with a young profile and long-term horizon for aggressive investors.

ELSS vs. Equity Funds

ELSS as a category has performed much better than Equity Mutual Funds. The average returns of ELSS and equity funds were 60% and 44% respectively for a three-year period and 145% and 116% respectively for a five-year period.

Normal equity funds do not have a lock-in, though there is an exit load. So fund managers are constantly making sure they have a liquid enough portfolio to meet redemption pressures if any. How is this different in ELSS? Since each cash flow has a lock-in of 3 years, what it does mean is that the fund manager can take long term calls on stocks and on the overall portfolio. It also means that the fund manager does not worry about meeting redemption pressures in the short run. Typically, you would see churn ratios (also called turnover ratio) being lower in ELSS as against large-cap funds. This is one of the main reasons that returns are a bit higher. The fund manager then can choose value stocks or growth stocks depending on his mandate of the fund. Holding period can be much higher in ELSS than usual equity funds.

Rising popularity, albeit a few concerns

ELSS has been gaining popularity over the years if the meteoric rise in assets under management is any indication. The category currently manages Rs 70,087 crore as of August 2017, up 18% on an annualised basis over the past decade compared with 16% growth for industry over the same period. Though ELSS funds have been gaining popularity with investors, most funds in the category are of a manoeuvrable size, with their average assets managed at Rs1,234 crore. This allows the schemes to fish for good bargains among small- and mid-cap stocks, without worrying about impact costs. You should invest only after considering your risk profile and conducting proper due diligence.

Need of the hour

ELSS funds are the best wealth creators among all the tax-saving avenues mentioned under Section 80C. It is the equity element that gives ELSS its unique wealth-creation abilities. So, invest in them only if you have a high risk-appetite to handle the volatility in the stock market. Though these schemes have a mandatory lock-in period of only three years, you should invest in them only if you have an investment horizon of five to seven years.  For a longer duration, any product which generates returns over and above inflation is good for the investor and in the category of tax-saving instruments, ELSS funds are the best of the lot till date. But are these funds always good for an investor? Does this fund suits every category of investor? Are these funds successful in generating good returns in the short term? Have you ever thought about these questions while investing or just invested because you need to save tax? You should avoid ELSS funds if you are looking for short term and are not comfortable with equities. However, you should also keep in mind that ELSS funds are not at all bad. In fact, ELSS is the best tax saving option available in India but only for those who are looking for long term investments and have the capacity to digest volatility.