Monday, November 25, 2019


FUND FULCRUM
November 2019

The asset base of the mutual fund industry increased to Rs 26.33 lakh crore in October 2019, a rise of 7.4 percent as compared with the preceding month, on the back of robust inflows in equity and liquid schemes. The 44-player industry logged an AUM of Rs 24.5 lakh crore in September 2019, according to data from the Association of Mutual Funds in India (AMFI). An analysis of quarterly average AUM of all fund houses shows that HDFC MF, ICICI Prudential MF and Aditya Birla Sun Life MF are the top three fund houses in terms of equity AAUM. Equity AAUM includes pure equity schemes and ELSS. HDFC MF’s equity AAUM for Jul-Sep stood at Rs 89,260 crore, ICICI Prudential MF’s AAUM at Rs 73, 566 crore and Aditya Birla Sun Life MF’s AAUM at Rs 68,499 crore. Next in this list was Nippon India MF with an AAUM of Rs 63,673 crore followed by SBI MF with an AAUM of Rs 61,318 crore. Apart from these five fund houses, Franklin Templeton, Axis, Kotak, UTI and DSP were among the top 10 MFs based on AAUM of equity schemes.  The total AAUM of pure equity schemes and ELSS stood at Rs 7.33 lakh crore. In terms of total assets in equity and hybrid funds, the top five fund houses remained the same. HDFC MF, ICICI Prudential MF and SBI MF hold the top three spots, respectively. Next in the list was Aditya Birla Sun Life MF followed by Nippon India MF. As many as nine fund houses have more than Rs 50,000 crore AAUM in equity and hybrid funds. 

Mutual fund houses witnessed an overall inflow of Rs 1.33 lakh crore in October 2019 after witnessing redemptions of Rs 1.52 lakh crore in September 2019. Of these, liquid funds alone witnessed an impressive over Rs 93,200 crore in October 2019. Fund managers attributed growth in the asset base to higher retail participation and robust inflows in equity schemes and liquid funds. The open-ended equity schemes witnessed an infusion of Rs 6,026 crore, while there was a small outflow of Rs 11 crore in close-ended equity plans, taking total equity inflows to Rs 6,015 crore in October 2019. In comparison, net inflows in equity and equity-linked saving schemes stood at Rs 6,489 crore in September 2019. Such inflows stood at Rs 9,090 crore in August 2019, Rs 8,092 crore in July 2019, Rs 7,585 crore in June 2019 and Rs 4,968 crore in May 2019. Net inflows continue to pour into the equity-oriented mutual fund schemes tracking the surge in the domestic markets. In October 2019, the category received slightly lower inflow compared to September 2019. The inflow indicates building up of a positive investment trend. Series of steps taken by the government in the recent times to boost domestic economy had improved sentiments and helped the markets to surge. This has helped investors slowly gain confidence and get back to investing. Additionally, the steady flow through SIP (Systematic Investors Plan) is also keeping the momentum going. Among debt-oriented schemes, liquid funds with investments in cash assets such as treasury bills, certificates of deposit and commercial paper for shorter horizon saw an infusion of Rs 93,203 crore in October 2019 as compared to an outflow of Rs 1.4 lakh crore in September 2019. Overall, debt funds saw an inflow of Rs 1.2 lakh crore. Besides, gold exchange-traded funds saw an outflow of Rs 31.45 crore after witnessing inflow in the preceding two months. The safe-haven asset saw an infusion of Rs 44 crore in September 2019 and Rs 145 crore in August 2019.

Despite the volatility in the equity market and worries over the economic slowdown, the mutual fund industry in October 2019 added the highest number of folios in three months. The mutual fund industry added 6 lakh investor accounts in October 2019, taking the total tally to 8.62 crore, according to the data released by Association of Mutual Funds in India. In comparison, the industry had added 3.45 lakh new folios in September 2019 and 4.8 lakh folios in August 2019. Overall, mutual fund schemes witnessed a net inflow of Rs 1.33 lakh crore last month as compared to an outflow of Rs 1.51 lakh crore in September 2019. The addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with mutual fund schemes. Meanwhile, amid intermittent bouts of volatility, BSE's benchmark Sensex rose 3.6 percent last month. The number of folios under the income/debt category went up to 57.89 lakh folios in October 2019 from to 56.79 lakh in September 2019. The folios in equity and equity-linked saving schemes rose by 3 lakh to 6.03 crore in October 2019 as compared to 6 crore at the end of September 2019.

Despite the volatility in the equity market, investors prefer to stay put in the equity mutual fund schemes. Data from the Association of Mutual Funds in India revealed that 35 percent of the mutual fund industry’s equity assets had remained invested for more than two years. Equity assets have a longer average holding period as compared to non-equity assets. In comparison, 28.4 percent industry’s equity assets in 2018 remained invested for more than two years in equity schemes. Not only this, equity assets that have stayed for 12-24 months rose to 31.7 percent, compared with 22 percent a year ago. This sticky money can be attributed to matured investor behavior and investor education. The investor education initiatives executed by all stakeholders in the mutual fund industry are showing positive results. During 2008-09, most retail investors did not stick to equity funds for long. In the last 10 years, mutual fund investors have experienced the importance of long-term equity investments for wealth creation. In the debt space, there was no significant change in the trend. As of September 2019, 23.1 percent of the industry’s debt assets stayed invested for more than two years as compared to 24.5 percent a year ago. Non-equity funds include liquid funds. People invest in liquid funds for short term goals and also to set up a systematic transfer plan (STP) into equity funds. We see a lot of investors taking the STP route to invest in equities. As such, the investors holding period for liquid funds tends to be very low and will affect the holding period for non-equity funds.

Piquant Parade
In the last six months, the equity AUM has decreased marginally to Rs 7.58 lakh crore in September 2019 from Rs 7.56 lakh crore in May 2019. The slowdown in most sectors or in the overall economy does not seem to have affected the mutual fund industry. This is evident from the fact that the mutual fund industry has witnessed more exits and entries in the fund management space. While there is a slew of fund manager movement in the equity fund management space, debt has not seen any major exits. Recently, Anand Shah exited BNP Paribas MF. In August 2019, Lalit Nambiar, Vice President and Fund Manager exited UTI MF, and he was replaced by Ankit Agarwal from Centrum Broking. In July 2019, Ravi Gopalakrishnan of Canara Robeco Mutual Fund joined Principal MF as head of equity, replacing PVK Mohan who quit in June 2019. In May 2019, HDFC Mutual Fund’s Senior Equity Fund Manager Srinivas Rao Ravuri quit to join PGIM India Mutual Fund (erstwhile DHFL Pramerica Mutual Fund). In November, 2019 Krishna Sanghavi joined Mahindra MF as CIO after quitting from Canara Robeco MF where he was the head of equities. It is good for the growth of the fund industry as it shows that the days of star fund manager culture of the early 2000s are now passe, wherein the departure of an X fund manager used to create investor exits from the mutual fund house. Being pooled investments, mutual fund investors are more secure in established investment processes and risk managing systems, rather than being subject to the whims and fancy of a particular star fund manager.
 Acquisition of IDBI Asset Management Company from IDBI Bank will offer many advantages to the gold loan lender, Muthoot Finance, which will be able to cross-sell mutual fund schemes to their gold loan borrowers. As on March 31, IDBI Bank’s stake in IDBI Asset Management stood at 66.67 percent, while IDBI Capital Markets & Securities owns 33.33 percent. Gold investors are for the long haul so MF as a class will naturally appeal to Muthoot Finance's gold loan clients. It is a win-win for Muthoot Finance. Muthoot Finance can also capitalise on its wide network of branches for selling mutual fund schemes. At present, Muthoot Finance has a mutual fund distribution arm: Muthoot Securities. Muthoot Finance is listed on BSE and NSE as a gold financing NBFC. In FY19, Muthoot Finance registered an 11 percent year-on-year growth in net profit at Rs 1,972 crore. Loan assets for the year stood at Rs 34,246 crore, a rise of 18 percent rise YoY. Conservative gold loan customers may not be comfortable subscribing to the more aggressive sectoral equity funds in the midcap and smallcap space of IDBI MF that Muthoot Finance will take over. Sectoral funds show wide volatility, which the stable value minded gold loan customers may shy away from. In that light, Muthoot group would be sourcing new investors to scale up the MF business.

Regulatory Rigmarole

Markets regulator SEBI's decision to allow Aadhaar as e-KYC for mutual fund investments will be a shot in the arm for the MF industry as it will reduce time for client onboarding and boost mutual fund penetration. On November 5, SEBI issued a detailed circular regarding the process to be followed for Aadhaar-based electronic KYC exercise for domestic investors. The circular mentions about the requirements to be fulfilled by entities registered with the UIDAI as KYC User Agency (KUA) as well as for sub-KUA. This is a step in the right direction as we had noticed lot of investors discontinuing SIPs after Aadhaar was disallowed to be used as e-KYC. SEBI in its last circular had mentioned that Aadhaar-based e-KYC investors can only invest up to Rs 50,000 in a financial year. This time around, SEBI has not made a mention of an upper limit for Aadhar-based KYC investors making investments. In September 2018, Supreme Court banned the use of Aadhaar data for financial transactions. This means a Permanent Account Number (PAN) is mandatory for every investor KYC. As per latest data, till July 2018, 1.22 billion Aadhar cards were existing, equal to 90 percent of population.

SEBI has now completed the circle of transparency by going ahead and issuing an additional circular regarding the segregation of asset provisions for unrated debt papers. SEBI initiated action in the valuation treatment of debt securities in case of credit events of the downgrade of a corporate debt paper by issuing two circulars, one in December 2018 on credit event and the other in November 2019 on unrated securities. Both the circulars were in response to liquidity woes in the NBFC sector and downgrades of multiple debt papers which had raised concerns about mutual fund investment in stressed companies such as Infrastructure Leasing & Financial Services Limited (IL&FS), Essel Group, and Dewan Housing Finance Ltd (DHFL). After the credit crisis in IL&FS, and DHFL, SEBI issued a comprehensive circular in December 2018 to allow mutual funds to segregate their holdings in stressed securities. Known as side-pocketing in mutual fund parlance, this refers to a practice where fund houses isolate risky assets from the rest of their holdings and cap redemption in the segregated assets. SEBI has now completed the circle of transparency by going ahead and issuing an additional circular regarding the segregation of asset provisions for unrated debt papers. SEBI has brought in clarity by issuing two circulars giving cut off points for both rated and unrated papers during credit event and when the debt paper should be considered as a default. For unrated papers, SEBI now mandates that such papers be reported immediately by mutual funds in actual default to AMFI which shall disseminate to the entire fund management industry. The provision of segregating assets in actual default and not on a credit event is understandable for unrated debt papers. This means, until now, the segregation of assets triggered when a bond’s credit rating went down. But, when bonds are not rated, a credit rating downgrade is out of question.

SEBI announced that minimum investment in a PMS scheme will now go up to Rs 50 lakh, up from Rs 25 lakh at present. Also, net worth requirement of portfolio managers will now go up to Rs 5 crore, up from Rs 2 crore. SEBI had constituted a working group to review SEBI (Portfolio Managers) Regulations, 1993 earlier this year. Distributors who have cleared the NISM (National Institute of Securities Management) examination and are registered with the Association of Mutual Funds of India (AMFI) will also now get to sell PMS schemes. PMS schemes will have to report fund performance in a uniform way. Past performance will be after-costs so that investors know that what is being reported is what they will actually get in their hand. SEBI will not cap charges that a PMS levies, the PMS will have to state upfront the range of expenses upfront, in the client-manager agreement. Operating expenses though will now be capped at 0.5 per cent, excluding brokerage charges. Revised guidelines will put restrictions on how much a PMS’ in-house distribution arm can sell such schemes. The revised guidelines will also mandate PMS to state exit loads clearly and upfront in the client-manager agreement. There will not be any SEBI-mandated limit. However, to make matters more transparent, PMS schemes will now have to give an illustration of performance and costs to new investors. The illustration will talk about how an investment of Rs 50 lakh will be subjected to various charges and costs in detail, how each of the deductions will be made before investors get to see the amount they will get in hand. The changes announced would be part of the proposed SEBI (Portfolio Managers) Regulations, 2019, such as the hike in minimum investment limit and net worth. The changes that do not require change in regulations will be done via circulars that SEBI can issue going ahead.

Monday, November 18, 2019


NFONEST
November 2019

NFOs of subdued hues adorn the November 2019 NFONEST. There has also been a drastic reduction in the number of upcoming NFOs.
Tata Focused Equity Fund
Opens: November 15, 2019
Closes: November 29, 2019
Entering the focused fund club (nearly 20 in number), Tata Mutual Fund has announced the launch of Tata Focused Equity Fund. The investment objective of this open-ended equity fund is to generate long term capital appreciation by investing in a concentrated portfolio of equity and equity related instruments of up to a maximum of 30 stocks across market capitalisation. The proportion of midcap/small cap will be governed by the relative risk-reward opportunity. The risk management framework will act as a guard rail. These practices are important, given the risks of running a focused fund. The fund is benchmarked against the S&P BSE 200 TRI. The fund will be managed by Mr. Rupesh Patel.

Union Large & Midcap Fund
Opens: November 15, 2019
Closes: November 29, 2019
Union Asset Management Company has announced the launch of Union Large & Midcap Fund, an open-ended equity fund investing in both largecap and midcap stocks. The investment objective of the fund is to seek to generate capital appreciation by investing predominantly in a portfolio of equity and equity linked securities of large cap and mid cap companies. By definition, a large and midcap fund has to have a minimum investment in equity and equity related instruments of large cap companies at 35% of total assets and minimum investment in equity and equity related instruments of mid cap stocks at 35% of total assets. Thus, at all times 70% of its assets will be in equity. The remaining 30% will be tactical allocation. The fund is benchmarked against S&P BSE 250 Large MidCap Index $ (TRI). It will be managed by Mr. Vinay Paharia, Chief Investment Officer, Union AMC.
Axis Greater China Equity Fund, HSBC Ultra Short Duration Fund, Axis Quant Fund and Sundaram Bluechip Fund are expected to be launched in the coming months.

Monday, November 11, 2019


GEM GAZE
November 2019
The consistent performance of four out of five funds in the November 2018 GEMGAZE is reflected in the four funds holding on to their esteemed position of GEM in the November 2019 GEMGAZE. Birla Sunlife Tax Plan has been shown the exit route in view of its lacklustre performance and Birla Sunlife Tax Relief 96 has been accorded a red carpet welcome.
Birla Sun Life Tax Relief 96 Gem
Superior Competitive Advantage
Launched in March1996, the Rs. 9129 crore Birla Sun Life Tax Relief 96, is one of the oldest ELSS funds in the industry. Currently, large caps account for 43.59% of the portfolio. Portfolio allocations show the fund to be small and mid-cap oriented when compared to its peers, with a 56.41% allocation to small and mid-cap stocks. This tax-saving fund is market cap neutral, with no bias towards any particular section of the market. Compared to peers, the fund has a higher exposure to the mid-cap segment, which reflects in its portfolio’s average market cap— half of its category average. With 44 stocks and the top 5 holdings accounting for 37.49%, the fund looks well-diversified. The fund invests 50.67% in the top three sectors, i.e., finance, healthcare and FMCG. The funds’ approach is aggressive, as the fund manager does not believe in index hugging. The fund takes large positions in its top bets, most of which are on stocks outside the benchmark index. The focus remains on companies boasting superior quality—with ability to sustain competitive advantages over longer periods. The emphasis on quality is visible in the slant towards MNC stocks. The fund has been a consistent outperformer over the years; since inception, this mutual fund has managed to give a very impressive return of 23.73% along with displaying a very consistent performance. In the past one year, 5 years and 10 years, the fund has earned returns of 8.03%, 11.38% and 12.31% respectively as against the category average of 11.08%, 8.79% and 11.68% respectively. The fund is benchmarked against the S&P BSE 200 TRI. The expense ratio is 2.06% and turnover ratio is 1%. The fund is managed by Mr. Ajay Garg since October 2006.
Franklin India Taxshield Fund Gem
Proven track record

Launched in April 1999, the Rs. 3,985 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. An established fund in the ELSS category, known for its consistency of returns and an ability to contain downside, it has religiously maintained a large-cap bias amid different market 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 81.23% 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. Globally, Franklin Templeton is known for its stock selection. The Franklin India Taxshield Fund adopts the value investment philosophy. With 51 stocks and the top 5 holdings accounting for 29.98%, the fund looks well diversified. The fund invests 57.83% in the top three sectors, i.e. finance, energy and FMCG. Since inception the fund has given returns of around 21.72%. In the past one year, five years and ten years the fund has earned returns of 8.10%, 8.29% and 13.27% respectively as against the category average of 11.08%, 8.79% and 11.68% respectively. The fund's returns in the last one year show a slowdown relative to the category and benchmark. The fund's year-to-year returns do not always beat its more aggressive peers, but its performance adds up to very handsome returns over the long term. The fund is benchmarked against NIFTY 500TRI. The expense ratio is 1.91% and turnover ratio is 20%. The fund is managed by Mr. R. Janakiraman and Mr. Lakshmikanth Reddy since May 2016.
ICICI Prudential Long-term Equity Fund Gem
One up on its peers
At Rs. 6,161 crore, ICICI Prudential Long-term Equity Fund, launched in August 1999, is one of the largest ELSS funds in the industry. Currently, large caps account for 71.88% of the portfolio. With 57 stocks and the top 5 holdings accounting for 28.19%, the fund looks well diversified. The fund invests 48.81% 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 has earned a return of 19.71% since the fund’s inception. In the past one year, five years and ten years, the fund has earned returns of 8.08%, 7.96% and 13.43% respectively as against the category average of 10.31%, 8.64% and 11.60% respectively. The fund is benchmarked against NIFTY 500TRI. The expense ratio is 2.14% and turnover ratio is 60%. The fund is managed by Mr. Sankaran Naren and Mr. Harish Bihani since November 2018.
Invesco India Tax Plan Gem
Quality conscious conservative fund
Incorporated in December 2006, Invesco India Tax Plan, with a corpus size of Rs. 962crore, 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 40 stocks without being overly diversified and the top 5 holdings constitute 34.96%. 55.24% of the assets are invested in the top three sectors, finance, energy and FMCG. Even though the fund currently has a large cap bias with 72.20% 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. Designed to own some of the best large-cap and mid-cap ideas of the fund house, the fund prefers quality businesses with healthy growth. But it is careful about not going overboard on valuations. The fund's recent large-cap tilt may help contain downside in the event of a market correction. The fund has delivered 13.77% returns since inception. The one-year, five year and ten year returns are 11.60%, 10.42% and 14.18% respectively as against the category average of 10.31%, 8.64% and 11.60% respectively. 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.  Stock picking has been the key for success of this fund. The fund is benchmarked against the S&P BSE 200 TRI. The expense ratio is 2.16% and the portfolio turnover ratio is 91%. The fund is managed by Mr. Amit Ganatra and Mr. Dhimant Kothari since March 2018.
DSP Tax Saver Fund Gem
Growth-oriented outperformance
Launched in January 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 6103 crore.  Though multi-cap by mandate, the fund has been quite large-cap oriented in the last five years. Typically, 65 to 75% of the portfolio has been in large-caps and 20 to 25% in mid-caps. The fund also takes tactical calls to capitalise on market trends and opportunities. It has a growth-oriented multi cap portfolio with 77.01% of the corpus in large cap stocks at present. There are 65 stocks in the portfolio. The top 5 holdings constitute 29.16%. 60.16% 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'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 13.56% returns since inception. In the last one year, five years, and ten years, the fund has earned returns of 18.05%, 11.17% and 13.77% respectively as against the category average of 10.31%, 8.64% and 11.60% respectively. The fund is benchmarked against NIFTY 500TRI. The expense ratio is 1.84% and the portfolio turnover ratio is 134%. The fund is managed by Mr. Rohit Singhania since July 2015.

Tuesday, November 05, 2019


FUND FLAVOUR
November 2019

ELSS –Tax saving and the power of compounding

Equity Linked Savings Scheme falls under the diversified category of mutual funds. While their maximum exposure is in equity and equity-oriented securities, a part of the corpus is also parked in debt. ELSS aims at providing the dual benefits of capital appreciation and tax savings, simultaneously. In the case of ELSS, an investor can stop contribution but cannot withdraw wholly or partially of his total investment before 3 years from the date of the first contribution. The amount invested up to a maximum of Rs. 1.5 Lakh in a year will qualify for tax deduction under Section 80C along with other instruments like Life Insurance Premium, PPF, etc. Since, it is equity linked mutual fund, there will not be any tax implication on the long-term capital gain as there is no tax on long-term capital gains for up to Rs. 1 lakh profit within a year, when you are selling the units after the 3-year mandatory lock-in period. Capital gains above Rs. 1 Lakh per year will be taxed at 10%.So, the sale proceeds after 3 years will be totally tax-free in your hands if the capital gains are less than Rs. 1 Lakh . You get tax deduction on investing also. Investments of up to Rs. 1.5 lakh made in ELSS qualify for an income tax deduction under the Section 80C of the Income Tax Act. This implies that if you have invested in ELSS, you can deduct the amount of your investment in an ELSS from your total income in order to eventually reduce your taxable income (or taxes). For example- Mr. X earns Rs.10 lakh per annum. On this income, he is liable to pay an income tax of 20%. If he does not invest any part of his income, he will be paying Rs. 1,25,000 (5% tax on 5 lakh- 25,000 and 20% on remaining 5 lakh- 1,00,000) as tax (excluding the amount of Educational cess). Now if he invests Rs. 1.5 lakh in ELSS, he will be liable to pay income tax on Rs. 8.5 lakh (10 lakh- 1.5 lakh). Hence, the amount of tax that he will pay will be Rs. 95,000 (5% on 5 lakh and 20% tax on 3.5 lakh) as tax (excluding the amount of Educational cess). ELSS is best suitable for young investors as they have time on their side to unleash the power of compounding to the fullest to enjoy high returns while saving on taxes of up to Rs 46,800 a year. You are free to invest either by giving lump sum amount at once or make investment via SIP route.

 

Why ELSS?

Here are some reasons that make equity linked saving scheme a better investment option.

·         Dual purpose investment: ELSS is a dual purpose investment. You can save tax as well as generate wealth by making the investment in ELSS
·         Lock-in period: An ELSS features the shortest lock-in period of 3 years among all the tax-saving investment options including fixed deposits, PPF (Public Provident Fund), NPS (National Pension System), NSC (National Savings Certificate), etc. thereby offering greater flexibility in the medium term.
·         Flexibility to choose the investment tenure: ELSS has no fixed maturity date or period. You can continue to hold ELSS as long as you can.
·         Curb volatility: ELSS funds curb the volatility associated with the stock market. Many retail investors get panic when they see their investments are losing value significantly. But after a certain period, the market recovers its loss and yields a significant return. As the ELSS scheme has a mandatory lock-in period of three years a market can never be downward for three years. It will definitely go upward and offer a superior return in the long term.
·          
Potentially higher market-linked Returns: Being a market-linked investment instrument, ELSS has the potential of giving relatively higher returns than other tax-saving instruments. Since it invests in a portfolio of equity instruments, ELSS can provide you returns ranging between 15%-18%. Fortunately being market-linked, tax saver mutual funds can provide potentially higher returns that can beat the adverse impact of inflation in the long term. This is the key reason why many individuals who make investments with the intention of planning for retirement or other future expenses have moved away from old school options such as fixed deposits and PPF to mutual funds and ELSS instead. In case of mutual funds such as ELSS, the potential returns being higher, these compounding benefits tend to add up faster for investors. It must however be pointed out that ELSS returns do not have a fixed ROI, hence during some periods, returns will be considerably higher than during other periods with historic long term average returns of equity schemes recorded at 12% per annum.
·         Taxation: In addition to qualifying for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, ELSS provides other tax benefits as well. Unlike tax-saving fixed deposits, the returns generated by an ELSS are only partially taxable as long-term capital gains of up to Rs. 1 lakh on ELSS are tax-free.
·         SIP option: An ELSS is the only tax-saving instrument that comes with a SIP (Systematic Investment Option) which brings discipline in regular investing. With the SIP option, an investor can invest an amount as low as Rs. 500 in an ELSS along with getting the benefit of the power of compounding.
·         Affordability: You can start with a minimum of Rs. 500 or a lumpsum amount. There is no maximum limit to invest.
·         High levels of Transparency: Mutual fund houses i.e., AMCs who manage ELSS and other mutual fund schemes are regulated by SEBI. As per SEBI guidelines, AMCs have to make periodic disclosures regarding key information of all schemes managed by them. Information provided through these mandatory disclosures include Net Asset Value (NAV), assets under management (AUM), scheme returns over different periods, total expense ratio (TER), current asset allocation, etc. While some of these have to be reported daily, others need to be reported as per a monthly or quarterly schedule. As of now, no tax saver investment in India features a higher degree of transparency than ELSS. Hence tax saver mutual funds ensure that you always have the latest information regarding the status of your investments.
·         Ease of Investment The advent of internet and related technology has significantly eased the pains related to making tax saving investments. However, many traditional tax-saving schemes such as PPF still require you to physically queue up at a designated bank or post office so that you can subscribe to the chosen instruments. Not in case of tax saver mutual funds. After having adopted Aadhaar-based e-kyc the industry as a whole allows investors to start investing online without having to leave the comfort of their home or office. You can of course still complete an in-person biometric KYC at designated RTA locations, but the advantage of a completely-online eKYC for tax saving investments is currently only available to mutual fund investors.

Why not ELSS?

Investing in Equity Linked Savings Scheme has the following drawbacks:
·         Risk involved: In comparison with its investment counterparts (such as NSC and PP), investments in ELSS have higher level of risk involved as it deals with equity instruments and related securities.
·         Unavailability of Partial Redemption: The amount invested in an ELSS scheme can be withdrawn only after the tenure of 3 years is over. In comparison, other investment options such as Fixed Deposits, etc. do not have such conditions.
·         Investment Horizon: ELSS mutual funds have delivered good returns if invested for more than five years. An investor should enter into equity (or ELSS) only if the holding period is more than five years, and with proper asset allocation.

 

Emergence of ELSS

ELSS is emerging as one of the preferred tax investment instruments especially among new and young investors. The young investors having a long term investment horizon and having ability to bear market risks usually prefer ELSS as there is an option to withdraw any time after the initial  3 years lock in period, with potentially higher returns. The Assets Under management (AUM) of Indian mutual fund industry as on December 31, 2018 was Rs. 22.86 lakh crore according to AMFI (Association of Mutual Funds in India). Out of the total assets under management, ELSS- equity schemes represent approximately 4% i.e. Rs. 88,152 crore. There are 70 ELSS schemes and out of that approximately 95% of ELSS schemes are open end equity funds (42 funds) and balance in close end funds (28 funds). Traditionally people prefer public provident fund, national savings certificates, and insurance plans for tax savings. A comparison carried out by valueresearchonline.com, between ELSS and PPF (Public Provident Fund) shows that if Rs.1.5 lakh were invested every year starting from 1999 till 2018 for 20 years in ELSS growing at peer group average return, the total corpus would have been Rs. 2.3 crore as compared Rs.77.8 lakh if invested in Public Provident Fund during the same period.

Growth of ELSS

The Assets Under Management (AUM) of mutual fund industry has grown from Rs.97,028 Crore in 1999 to Rs.22,85,912 Crore in 2018 at a CAGR (compounded annualized growth rate) of 18.09% whereas the ELSS AUM has grown from Rs.2,663 Crore to Rs.88,152 Crore @CAGR of 20.22% during the same period. As the growth of ELSS was higher than mutual fund industry AUM growth, the share of wallet of ELSS AUM to total industry AUM has increased from 2.745% to 3.856% in last 19 years. As far as the number of ELSS schemes is concerned, it has increased from 65 in 1999 to 70 in 2018 both in close and open end category. The number of schemes has not increased because of regulatory restrictions on having multiple schemes in the same category and consolidation of similar schemes.

ELSS performance

Performance analysis is carried out for 28 open end ELSS schemes having more than Rs. 100 Crore Average Assets Under Management (AAUM) as on January 21, 2019. The largest fund in the group is Axis Long Term Equity Fund (Rs. 17,852 Crore) representing 20% of total ELSS AAUM of the industry and the smallest fund in size is Baroda ELSS 96 (Rs. 142 Crore) representing 0.16% of the industry ELSS AAUM. The total ELSS AAUM analysed is Rs.80593 Crore (91%) out of industry ELSS AAUM of Rs.88,152 Crore. The compounded annualized growth rate for the 28 funds is calculated for 1, 2 years, 3 years, 5 years and 10 years period as on January 21, 2019. Even though the performance is calculated for various periods, it is ideal to compare for 3 years and above period as the ELSS schemes are locked in for minimum 3 years period. For scheme comparison the Net Asset Value (NAV) of Growth options of schemes on various dates taken and appreciation in NAV measured from point to point. Based on the analysis, it is observed that the peer group average return of ELSS schemes as on January 21, 2019 for 1 year period was (-8.91)% as compared to (- 1.80)% of S&P BSE 200 benchmark index. All ELSS schemes understudy have given negative returns except Canara Robeco Equity Tax saver fund in one year period. For 2 years & 3 years period the peer group average of ELSS schemes has given positive returns but lower than the benchmark. There will be minimum lock in of 3 years for ELSS, therefore, it is ideal to compare for 3 years and above period. It is observed that for 3 years, 5 years and 10 years period the average returns of the peer group was 13.66% (benchmark 16.33%), 15.68% (benchmark 14.58%) and 18.03% (benchmark 17.62%).


The latest S&P Indices Versus Active India Scorecard reveals that over the one-year period ending June 2019, 80.95 % of Indian ELSS funds, 76.67% of large-cap equity funds, 76.92% of Indian Government Bond Funds and more than 95% of Indian Composite Bond funds underperformed their respective indices. In fact, across all the periods studied, the majority of actively managed large-cap equity funds in India underperformed the S&P BSE 100. Large-cap funds witnessed a low style consistency of 16.67% over the ten-year period and a low survivorship rate of 68.33%. Over the 10-year period, the return spread for actively managed mid/small-cap equity funds, between the first and the third quartile break points of the fund performance, stood at 3.94%, pointing to a relatively large spread in fund returns. Meanwhile, the return spread for actively managed large-cap equity funds was lower at 2.98% over the same period. The asset-weighted return for large-cap equity funds was 85 basis points higher than the equal-weighted return over the 10-year period. During the same period, the asset-weighted return of Indian Equity Mid-/Small-Cap funds was 22 basis points higher than their equal-weighted fund return. Over a 10-year period, the return spread between the first and third quartile break points of the fund performance was 3.20% for Indian ELSS funds.

How to invest in ELSS through online and offline modes

Individuals can invest in ELSS using both online and offline modes. The requirements for both are as follows:
·         Online Investment: To invest in ELSS using the online medium, investors must complete their online registration by doing Aadhar-based KYC. Once the verification is done, you will receive a pre-filled bank mandate on your email, post which a final confirmation email with your FATCA details from NSE will be sent.
·         Offline Investment: To invest using the offline mode, you still need to complete your KYC first. For this, you will be required to carry documents such as Aadhaar, PAN card, post-dated cheques in favor of the mutual fund scheme are submitted with the bank. Investors can also contact the fund advisor for the same.

 

ELSS Evaluation

 

While selecting a fund, you should analyse and compare different parameters of various funds before choosing one. Also, investing depends on an individual’s financial goals, investment horizon, and risk appetite. In order to choose the best ELSS funds we can take the following parameters into consideration:
Consistent performance and track record
Expense Ratio
Asset size i.e. Assets under management (AUM)
Judge the portfolio characteristics
Financial Parameters
Investment Rating
When you select ELSS, give importance to the ones that have a consistent performance track record and follow robust investment processes and systems at the fund house. Looking for ELSS with a consistent performance track record, besides qualitative aspects like fund house pedigree, and investment process, quality of the fund management team among others is imperative.
Expense ratio is a charge that your Mutual fund Company or your agent/distributor/broker imposes for its services. You may rather increase your investment amount via SIP instead of increasing the number of your ELSS mutual fund.
The lower the asset size of your equity mutual fund the higher the risk involved. So you need to choose such an ELSS mutual fund which has a comfortable asset size.
The portfolio quality of an ELSS points could signal how the fund is likely to perform in the future. Ideally, an ELSS should not hold a very concentrated portfolio, since it heightens the risk involved. The portfolio of a fund should be well-diversified and the exposure to the top-10 stocks should be ideally under 50% while concentration to one particular sector should not exceed 30-35%. Further, the ELSS should not be churning the portfolio very often. Portfolio churning is indicated by the portfolio turnover, which ideally should not exceed 100%. Penalise a fund with a high portfolio turnover ratio.
Consider various parameters such as Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta to analyse the performance of a fund. A fund having a higher standard deviation and beta is riskier than a fund having a lower deviation and beta. Choose funds having a higher Sharpe Ratio as they offer higher returns for each additional risk you take. The person who is managing the fund plays a key role in building fund trust. The fund manager plays a vital role as his competency skills and experience helps to build confidence as picking up the right stocks and creating a strong portfolio is what helps the fund to deliver high returns. Compare the performance of ELSS across bull and bear market phases to ascertain how best the scheme is able to get the most out of the bull phase and also how well it has been able to arrest the downside during the bear phase.
There are many rating agencies which are in operation like Crisil, Morgan-Stanley, Value Research, Standard & Poor etc. You have to follow the rating given by these rating agencies. Generally, A+ or Rank 1 or 5-Star rating is an ideal investment grade of an ELSS in which you are free to invest your hard earned money.

 

The ELSS Journey…

Include your ELSS investments in your overall financial plan. They are ideal to meet your long-term financial goals. You need not rush to redeem them as soon as they complete the mandatory lock-in period of three years. You may hold on to these schemes as long as they are performing well. You can sell them a year or two before (even earlier) the financial goal assigned to them. Selecting the best ELSS requires some hard-work and data crunching on your part, as an investor. While selecting your ELSS fund, remember that it is a long term commitment. Always go with the fund houses that have a reputation to protect. Five year returns are ideal as they give a long term perspective. However, in case of ELSS (considering its lock-in of 3 years), you must also look at 3-year returns to ensure that the exit cost is not too high. A small variance with the 5 year returns is understandable but wild variations are a sign of inconsistency. One year returns are meant to judge the short term flexibility of the fund manager and to keep a tab on whether the fund is trying to be too aggressive in search of returns. This can be a good starting point for your ELSS journey!