FUND FULCRUM (contd.)

August 2020

Despite lockdown and market volatility, the average number of folios of investors in the mutual fund industry has risen consistently since March 2020. The average number of folios of investors across the industry has increased by 18.5% since March 2020 to Rs 2.94 lakh in July 2020. The number stood at Rs 2.48 lakh in March 2020, 2.65 lakh in April 2020, Rs.2.70 lakh in May 2020 and Rs.2.78 lakh in June 2020. Further, the average number of folios of retail investors rose to Rs 1.54 lakh from Rs 1.33 lakh. As of July 2020, the average folio assets of retail investors in B30 cities was at Rs.90,000 as compared to Rs.77,000 in March 2020. This shows an increase of nearly 17% since March 2020. In T30 cities, the average folio assets of retail investors rose by 16% since March 2020 to Rs.2 lakh in July 2020 as against Rs.1.73 lakh in March 2020. Over the last one year, average folio AUM of retail investors has declined substantially. The latest AMFI data shows that average folio AUM of retail investors fell by 15% to Rs.54,130 in June 2020 compared to Rs.63,701 in June 2019. Similarly, average folio AUM of HNIs has come down 18% from Rs.9.47 lakh in June 2019 to Rs.7.81 lakh in June 2020. The fall in average folio AUM is largely because of mark-to-market loss and heightened volatility since March 2020. In terms of average account size, all scheme categories except solution oriented and debt oriented schemes witnessed a fall in its average folio AUM. Liquid/money market scheme, equity oriented scheme, hybrid schemes, ETFs, FoFs and index funds in June quarter 2020 fell 8%, 11%, 11%, 44% and 11% respectively from June quarter 2019. Meanwhile, the average folio size of solution oriented schemes and debt schemes increased by 6% and 4%, respectively. This can be attributed to investors’ increasing interest in debt funds. Many investors have put their additional savings during lockdown months in debt funds that have performed well recently. Another reason could be mark-to-market gains in equity funds.

Piquant Parade

 

AMFI has completed its 25 years, a silver jubilee milestone. AMFI was incorporated in August 1995 when there were around 15 member AMCs. The industry body now has 44 members. Over the last 25 years AMFI has been spreading investor education, creating financial inclusion, bringing global best practices to the industry, improving corporate governance and lowering cost of transactions through economies of scale. In fact, ‘Mutual Funds Sahi Hai’ media campaigns have helped reach out to larger retail audience and create awareness. From largely an urban and institution focused industry, mutual funds now have over 15% of the assets coming from beyond the top 30 cities and 52% of assets coming from individual investors.

 

PAG, an Asia-focused investment group has acquired majority stake in Edelweiss Wealth Management. The company has invested USD 300 million or Rs.2200 crore for a 51% stake in Edelweiss Wealth Management. The wealth management business, including capital markets, provides wealth management services to over 2,400 of India’s wealthiest families as well as 6.10 lakh HNIs and other affluent clients. The company manages assets under advice of Rs.1.27 trillion as on June 2020. This investment endorses the core strategy of incubating businesses, building value and growing them into market leaders as they gradually move from inter-dependence to independence. The investment in Edelweiss Wealth marks a milestone in PAG’s investments in the Indian market.

Regulatory Rigmarole

Markets regulator SEBI imposed a penalty of Rs 10 lakh each on three public sector financial institutions - SBI, LIC and Bank of Baroda -- for not complying with the mutual fund norms. SEBI observed that State Bank of India (SBI), Life Insurance Corporation of India (LIC) and Bank of Baroda (BoB) are the sponsors of SBI Mutual Fund, LIC Mutual Fund and Baroda Mutual Fund, respectively, and they also hold more than 10 percent stake each in these mutual funds. In addition, UTI AMC is promoted by four public sector financial institutions as sponsors -- SBI, LIC, BoB and Punjab National Bank (PNB) -- with each of them currently holding 18.24 percent stake in the fund house, while private equity firm T Rowe Price International holds 26 percent stake in UTI AMC. This is not in conformity with the requirement of mutual fund regulations. The regulator amended the mutual fund regulations in March 2018, wherein a shareholder or a sponsor owning at least 10 percent stake in an AMC is not allowed to have 10 percent or more stake in another mutual fund house operating in the country. Entities not in compliance with the requirement were given time up to March 2019 to comply with the requirement. SEBI noted that the three entities have not denied the fact that they have not complied with the provisions of mutual fund regulations although they stated that the IPO (initial public offering) process for divestment of their shareholding in UTI AMC has been initiated and sale of its stake in UTI Trustee company is in the process of finalisation. They further said the IPO of UTI AMC will be completed by the end of September 2020.

Capital markets regulator SEBI has said that the issuer of structured products or market-linked debentures (MLDs) will have to hire a third party valuation agency for the valuation of such products. The regulator has made these changes because of amendment done in rating agencies' norms. Pursuant to amendment to SEBI's rating agencies regulation on May 30, 2018, a CRA cannot carry out any activity other than rating of securities post May 30, 2020. Accordingly, the regulator has decided that valuation of MLDs will be carried out by an agency appointed by AMFI for the purpose of carrying out valuation.

 

Debt funds have been in the spotlight for various reasons. As a result, concerns over fund houses investing in risky assets have increased more than ever. Keeping this in mind, AMFI has asked fund houses to include some additional disclosures in their monthly factsheet. The objective is to bring transparency and uniformity in these disclosures so that it becomes easier to evaluate the quality of debt funds. Among the key disclosures will be macaulay duration, modified duration, average maturity and yield to maturity. Currently, fund houses do not publish all these measures separately in their factsheets. Macaulay duration of a fund measures how long it takes for the price of a bond to be repaid by the cash flows from it. Simply put, it indicates the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments. In mutual fund parlance, Macaulay duration of a debt fund is the weighted average Macaulay duration of the debt securities in the portfolio. Similarly, modified duration measures the sensitivity of a bond’s price to the change in interest rates. The higher the duration, the more volatility the bond exhibits with change in interest rates. For instance, if the modified duration of the fund is four, it indicates that the price of the bond will decrease by 4% with 1% or 100 bps increase in interest rates. Yield to maturity of a debt fund is the rate of return an investor could expect if all the securities in the portfolio are held until maturity. For instance, if a debt fund has an YTM of 7%; it means that if the portfolio remains constant until all the holdings mature then the return to the investor would be 7%. However, the YTM does not remain constant as some of the debt instruments are actively traded by the fund manager. Average maturity is the average time it takes for securities in the portfolio to mature, weighted in proportion to the amount invested. It indicates the sensitivity of the portfolio to interest rate changes. The higher the average maturity, the greater is the volatility of returns in the fund. It helps investors check if debt funds are suitable for the time horizon of their investment.

SEBI has allowed stock exchanges to propose a subsidiary that would regulate registered investment advisors (RIAs). In a recent circular, the market regulator said, “Considering the growing number of RIAs, it is decided to recognize a wholly-owned subsidiary of the stock exchange (stock exchange subsidiary) to administer and supervise investment advisors registered with SEBI.” Further, SEBI has put in place the criteria for a stock exchange subsidiary to become the regulator of RIAs. SEBI said that the recognition of the stock exchange subsidiary will be based on the eligibility of its parent entity i.e. the stock exchange. Following are the eligibility criteria laid down for the stock exchange:

·         Number of years of existence: Minimum 15 years

·         Stock exchanges having a minimum net worth of Rs.200 crore

·         Stock exchanges having nation-wide terminals

·         Investor grievance redressal mechanism including arbitration

·      Capacity for investor service management to be gauged through reach of investor service centers (ISCs). The stock exchange has to have ISCs in at least 20 cities

Moreover, SEBI said that the stock exchanges will either form a subsidiary or designate an existing subsidiary for the purpose of regulating RIAs. The stock exchange subsidiary will have to put in place systems for grievance redressal, administrative action against IAs, maintain data and share information with SEBI. The subsidiary needs to have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge its responsibilities. SEBI also laid the responsibilities of the stock exchange's subsidiary. SEBI said they are required to supervise RIAs, including both onsite and offsite, redress grievance of clients and IAs, take administrative action including issuing warning and referring to SEBI for enforcement action. In addition, the subsidiary will have to monitor activities of RIAs by obtaining periodical reports, submit such reports to SEBI and maintain the database of RIAs. The stock exchanges fulfilling these criteria may submit a detailed proposal to SEBI within 30 days from August 6, 2020.

 

SEBI will no longer entertain email complaints. In fact, the market regulator will only process complaints that are registered on SCORES. SEBI has urged investors to lodge complaints related to securities market entities like mutual funds, PMS, AIFs and RIAs only through its web-based centralised grievance redressal system SEBI Complaints Redress System (SCORES). The market regulator receives a large number of complaints on its generic e-mail ID sebi@sebi.gov.in and official IDs of SEBI officers. All complaints sent on sebi@sebi.gov.in and official IDs of SEBI officers were then uploaded on SCORES. However, SEBI has now decided that complaints against registered intermediaries sent on sebi@sebi.gov.in or on any official ID of SEBI officers will not be processed. Earlier in March 2020, SEBI launched the SCORES mobile app for the convenience of investors in lodging grievances. The app has all the features of SCORES, which are presently available on SCORES portal. SCORES mobile app is available on both Apple App Store and Google Play Store.

 

Over the past decade, investors across the world have increasingly started taking into consideration the non-financial impact of companies that they invest in. According to a 2006 study, millennials are more likely to trust a company or purchase a company's products when the company has a reputation of being socially or environmentally responsible. Half of those surveyed are more likely to turn down a product or service from a company perceived to be socially or environmentally irresponsible. Overall, this emphasis on the societal impact of a company has led to the popularisation of a new way of investing called ESG investing. ESG stands for Environmental, Social, and Governance. ESG investing refers to a class of investing also known as sustainable investing. The goal for an ESG investor is to seek financial returns along with a positive long-term impact on society and the environment. ESG are three central factors in measuring the sustainability and ethical impact of a company. Environmental factors determine a company's impact on the environment and focus on waste and pollution, resource depletion, greenhouse gas (GHG) emissions, deforestation, and climate change. Social factors look at how a company treats people and focuses on employee relations and diversity, working conditions, local communities, health and safety, and conflict. Governance factors take a look at corporate policies and how a company is governed. Today ESG investing is estimated at over $20 trillion in AUM or a quarter of all professionally managed assets around the world. Over time ESG investing has evolved from funds that simply screened out undesirable companies like polluters or sellers of tobacco to strategies that apply a matrix of sophisticated screens to assess the best and worst players in every industry and actively seek to have a positive impact in many ways. India is still in the early days of ESG investing. But interest in the space has been increasing. There are a couple of mutual funds that have launched ESG funds in recent times such as the Axis ESG fund and the SBI Magnum Equity ESG Fund. One of the challenges with ESG investing in India is that finding companies that score well on the environment and governance standards can be difficult. As we have seen with the banking sector fiascos, even large listed companies face governance issues. Further, environmental impact is often overlooked when making key business decisions. COVID was the first big test for ESG supporters across the world and data seems to indicate that it passed the test with flying colours.

FUND FULCRUM

August 2020

Equity-oriented mutual funds witnessed their first major monthly net outflow in a long time. In July 2020, except for ETFs and Focused Fund categories, all the other equity categories witnessed net outflow for the month. Multi cap fund category was the worst hit followed by mid cap and value fund categories. According to the data released by Association of Mutual Funds in India, multi cap schemes saw the highest outflows of Rs 1,033.17 crore followed by mid cap funds with outflows of Rs 579 crore. The outflows are largely attributed to investors booking profit given the surge in the equity markets, across market segments in July 2020. Overall, outflows in equity-oriented schemes stood at Rs 2,480.35 crore. Inflows in ETFs saw a rise in July 2020 at Rs 13,125.6 crore against Rs 4,093 crore in June 2020. With equity markets doing well and stable scenario in the fixed income markets, hybrid schemes too witnessed significant net outflows, viewing the scenario as a good opportunity to exit. Balanced Hybrid Fund/Aggressive Hybrid Fund, whose mandate is to invest between 65-80 percent of assets in equities, witnessed a net outflow of Rs 2,196.3 crores in July 2020. Otherwise too, this category has been witnessing consistent net outflow for a long time, given the challenging scenario in both equity and debt markets earlier. In July 2020, hybrid fund outflows were at Rs 7,302 crore compared with Rs 355.8 crore seen in June 2020. The outflows in most debt categories reversed in the month of July 2020. Liquid fund inflows which are used by corporates to park surplus cash witnessed Rs 14,055 crore worth of inflows in July 2020 as against Rs 44,226.2 crore of outflows in June 2020. The rise in debt fund inflows can be attributed to benign interest rate scenario.

 

The mutual fund industry added over 5.6 lakh investor accounts in July 2020, taking the total tally to 9.2 crore, primarily on account of contribution from debt schemes. In comparison, the industry had added 5 lakh new folios in June 2020. According to data from Association of Mutual Funds in India, the number of folios with 45 fund houses rose to 9,21,05,737 at the end of July 2020, from 9,15,42,092 at the end of June 2020, registering a gain of 5.63 lakh folios. Of the total new folios in July 2020, more than 4 lakh were added in debt funds. The addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with the mutual fund schemes. The sector added 6.13 lakh investor accounts in May 2020, 6.82 lakh in April 2020 and 9.1 lakh in March 2020. The number of folios under the equity and equity-linked saving schemes marginally dropped in July 2020. The investor count slipped to 6.37 crore. The debt oriented schemes folios count went up by 4.25 lakh to 68.85 lakh. Barring overnight funds, all the categories in debt funds witnessed a growth in folios. Corporate bond funds added 60,269 folios in July 2020, followed by liquid funds (58,379), short duration funds (54,002) and banking and PSU Funds (51,626). Overall, investors pumped in Rs 89,813 crore into various mutual fund schemes in July 2020. Fixed income securities or debt funds witnessed an inflow of Rs 91,392 crore, while equity-oriented funds saw its first withdrawal in over four years at Rs 2,480 crore. The inflow has pushed the asset base of the mutual funds industry to Rs 27.12 lakh crore at the end of July 2020 from Rs 25.5 lakh crore as on June 30, 2020.

 

Although the last couple of months have been like a nightmare for most industries, one positive thing that happened to the mutual fund industry is the addition of new investors. As per AMFI’s latest monthly data, the industry added 3.43 lakh unique investors between March and July 2020. The data has identified the number of unique investors by taking into account PANs/PEKRNs (PAN Exempted KYC Registration Number) of all unit holders or their guardians in case of minor unit holders. As on July 2020, the MF industry has 2.11 crore unique investors in total, out of which 2.06 crore unique investors have PAN.  Moreover, the industry added 5.64 lakh new folios in July 2020 taking the total folio count to 9.15 crore. In July 2020 itself, the industry added close to 1 lakh new investors. Many new investors have opened demat and mutual fund accounts during lockdown. Individuals have been saving money incurred on travel, eating out and so on. Also, people have started exploring investment opportunities other than bank FDs like mutual funds for better returns. Mutual fund industry has a long way to go in terms of number of investors. Out of 1.3 billion India’s population, the industry has only 2.1 crore unique investors.

 

Investors continue to prefer SIP option for investing in mutual funds, as the industry garnered over Rs 50,000 crore through this route in the first six months of 2020, up 3 per cent from the same period one year ago. This rising trend is in contrast with the extreme volatility in the broader market amid concerns over the impact of COVID-19. Systematic investment plan or SIP has been the preferred route for retail investors to invest in mutual funds as it helps them reduce market timing risk. According to the Association of Mutual Funds in India (AMFI), SIP contribution from January to June 2020 rose to Rs 50,102 crore from Rs 48,757 crore in the first half of 2019. Inflows into SIPs have averaged about Rs 8,350 crore in the past 6 months. Indian SIP investors are showing immense resilience amidst the ups and downs in market. Clearly, SIP as a medium has gained immense popularity. However, inflows through SIP have slowed down in the past three months. Investment in the month of June 2020 dropped below Rs 8,000 crore for the first time since November 2018. Net investments through such route stood at Rs 7,927 crore in June 2020 as against Rs 8,123 crore in May 2020, Rs 8,376 crore in April 2020. Prior to this, it was Rs 8,641 crore in March 2020, Rs 8,513 crore in February 2020 and Rs 8,532 crore in January 2020. The slowdown in monthly SIP contribution could be due to strain on cash flows and incomes experienced by several investors on account of the COVID situation. Currently, mutual funds have 3.23 crore SIP accounts through which investors regularly invest in Indian mutual fund schemes. The 45-player mutual fund industry, which mainly depends on SIPs for inflows, witnessed an investment of over Rs 42,400 crore in equity oriented schemes in the first six months of the year.

Mirae Asset MF, Canara Robeco MF and Invesco MF are the top 3 fund houses respectively in percentage terms to chart the highest increase in their equity holdings in July 2020, according to a report by Motilal Oswal Financial Services. The report analysed the month on month change in the top 20 fund houses’ equity exposure i.e. equity components of all schemes. Next in the list are Axis MF, Kotak MF and UTI MF. All these fund houses witnessed over 7% rise in their equity exposure. According to the report, the rise in equity exposure is a combination of inflows to the fund and mark to market changes in the fund house’s equity assets. Further, the report shows that the MF industry’s top 20 fund houses have witnessed nearly 5% jump in their equity exposure to Rs.11.07 lakh crore in July 2020 from Rs.10.49 lakh crore in June 2020. This was largely following the continuous recovery in the equity market even as fund houses witnessed outflows from the equity fund category. Among all the fund houses, SBI MF has the highest exposure to equities at over Rs.2 lakh crore. Next in the list are HDFC MF with Rs.1.33 lakh crore, ICICI Prudential MF at Rs.1.26 lakh crore, Nippon India MF at Rs.89,200 crore, UTI MF at Rs.77,900 crore and Aditya Birla Sun Life MF at Rs. 75,000 crore.

 

The latest AMFI data shows that New Delhi, Goa and Maharashtra were the top three states with highest per capita AUM and AUM to GDP ratio as on June 2020. While the per capita AUM of New Delhi was Rs.1.20 lakh, the per capita AUM of Goa and Maharashtra stood at Rs.98,467 and Rs.94,541 respectively. Per capita AUM in mutual funds is the total AUM of the state divided by the total population of the state. Other states that have high per capita AUM were Chandigarh, Haryana, Karnataka, Gujarat, Tamil Nadu, West Bengal and Sikkim. In terms of AUM as a percentage of GDP, Maharashtra secured the top position with 47.9%. New Delhi and Goa followed Maharashtra with 30.6% and 19.7%, respectively. Meanwhile, north eastern states like Manipur, Arunachal Pradesh, Tripura and Nagaland were among the bottom 10 in terms of both AUM as a percentage of GDP and per capita AAUM.

 

Direct plans of equity schemes of top fund houses have become costlier now as many fund houses have increased the TER in these plans. Among such top fund houses are SBI MF, ICICI Prudential MF, Nippon India MF, Axis MF, Franklin Templeton MF, DSP MF and Mirae Asset MF. The TER in the direct plan has increased due to a reduction in marketing and selling costs which include distributor commission. AMCs follow a formula prescribed by SEBI to determine the TER of schemes. According to this formula, TER of a direct plan is arrived after deducting distribution cost and various other marketing and sales costs from the regular plan TER. To simplify, assume that an equity fund’s regular plan TER is 2% of the scheme. And distribution and marketing cost is around 0.6%. Therefore, the direct plan TER of this scheme will stand at 1.4%. If the marketing and selling cost comes down by 20 bps to 0.4%, the direct plan TER will increase by 20 bps to 1.6% from 1.4% earlier. In the recent past, since the marketing and selling cost in these schemes have come down, the direct plan TER has to be increased.

Piquant Parade

Even as the covid-19 pandemic posed a huge challenge for the Mutual Fund industry and SEBI tightened the norms for doing advisory business, SEBI website shows that 32 applicants have sought permission from the regulator to start their Mutual Fund advisory business. Of this, 15 are individual RIAs while the remaining 17 are institutional RIA players. Last financial year i.e. in FY 2018-19, there were 153 applicants to become RIA and 75 of them had applied to become individual RIA. In fact, on a year-on-year basis comparison, more advisors have applied to start their advisory business in April-June this year as against the corresponding period last year. In April-June 2019, only 7 players had applied to get the RIA license. This has come even as the market regulator has tightened compliance norms to practice advisory business. SEBI has said that individual RIAs cannot offer both advisory and execution services to their clients. This is a challenge for many individual RIAs as many have been carrying out both advisory and distribution activities under one roof often through a family member. In addition, it is likely that SEBI will ask RIAs to either charge a fixed or a percentage fee based on the quantum of assets under advice. Now most advisors charge their clients a bit of both. Further, SEBI has said that individual RIAs must have a net-worth of Rs 5 lakh, up from Rs 1 lakh earlier. And if any individual advisor has more than 150 clients, they will have to get registered as ‘non-individual advisors’. This means such advisors will have to have at least Rs 50 lakh net worth to continue advisory business. 

 

Yes Bank has sold 100% of the equity shareholding of Yes AMC and Yes Trustee Limited (YTL) to GPL Finance and Investments Limited (GPLFI). GPLFI is into financing business and is owned by White Oak Investment Management, which is a Mumbai-based boutique investment management and investment advisory firm led by Prashant Khemka. Khemka was chief investment officer and lead portfolio manager for Goldman Sachs India Equity at Goldman Sachs Asset Management. The transaction is subject to requisite regulatory approvals from the regulatory authorities. Upon completion of the transaction, Yes AMC and YTL (both are wholly owned subsidiaries of Yes Bank) will cease to be subsidiaries of Yes Bank and the bank will exit its mutual fund business. Yes Mutual Fund had Rs 56.97 crore of average AUM in the June 2020 quarter, significantly down from Rs 2,000 crore in March 2019. Yes Bank has exited the mutual fund business to concentrate on its core business.

…to be continued…

 

NFONEST

August 2020

After a lone New Fund Offer (NFO) made its appearance in June 2020, July 2020 and August 2020 have just two NFOs open in view of the ongoing COVID-19 pandemic.    

Nippon India Multi Asset Fund

Opens: August 7, 2020

Closes: August 21, 2020

Nippon Life India Mutual Fund has launched Nippon India Multi Asset Fund. It is an open-ended scheme that will invest across asset classes like equity, debt and commodities to provide benefits of growth, stability and diversification. The primary investment objective of Nippon India Multi Asset Fund is to seek long term capital growth by investing in equity and equity related securities, debt and money market instruments and Exchange Traded Commodity Derivatives and Gold ETF as permitted by SEBI from time to time. SEBI defines a Multi Asset Fund as a scheme which invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. The fund will invest 50% to 80% in equity and equity related securities (including overseas securities/Overseas ETF), 10% to 20% in debt and money market instruments and 10% to 30% in the commodities, including gold Exchange Traded Funds. The benchmark of this scheme is 50% of S&P BSE 500, 20% of CRISIL Short Term Bond Fund Index and 30% of Thompson Reuters – MCX iCOMDEX Composite Index. The fund will be managed by Manish Gunwani, CIO - Equity Investments along with Ashutosh Bhargava, Fund Manager and Head Equity Research, Kinjal Desai, Fund Manager - Overseas; Amit Tripathi CIO - Fixed Income and Vikram Dhawan Head – Commodities. Investors tend to have a home-bias and invest mainly into domestic equities. It is important for investors to have a foot in every major investible asset classes, including international equities and commodities, which could help them balance returns across cycles.

Mahindra Manulife Arbitrage Yojana

Opens: August 12, 2020

Closes: August 19, 2020

Mahindra Manulife Mutual Fund has launched Mahindra Manulife Arbitrage Yojana for investment in arbitrage opportunities. It is an open-ended fund for investment in arbitrage opportunities available in equity, derivatives and debt markets. The fund, under normal circumstances, would invest a minimum of 65-100 percent in equity and equity-related instruments, including equity derivatives, up to 35 percent in debt and money market securities including tri-party repo, reverse repo. Under defensive circumstances, the scheme would invest 0- 65 percent in equity and equity-related instruments, including equity derivatives, up to 35-100 percent in debt and money market securities, including tri-party repo, reverse repo, and up to 10 percent in units issued by REITs & InvITs. The arbitrage yojana is suitable for investors seeking income through arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment over the short term. The scheme will use several strategies to identify arbitrage opportunities across market cycles and offer returns at relatively lower volatility and lower risk. The fund is benchmarked against the Nifty 50 Arbitrage Index TRI. The fund managers are Mr. Srinivasan Ramamurthy for the equity portion and Mr. Rahul Pal for the debt portion.

HSBC Corporate Debt Fund, Edelweiss MSCI India Financials Index Fund, Axis Value Fund, Baroda Value Fund, Motilal Oswal Asset Allocation Index Fund of Fund – Conservative,  Motilal Oswal Asset Allocation Index Fund of Fund – Aggressive, Motilal Oswal 5 Year G-Sec ETF and Invesco India Feeder – Invesco Global Consumer Trends Fund are expected to be launched in the coming months.

 GEM GAZE

August 2020

The consistent performance of all five funds in the November 2019 GEMGAZE is reflected in the five funds holding on to their esteemed position of GEM in the August 2020 GEMGAZE.

Birla Sun Life Tax Relief 96 Gem

Consistent Outperformer

Launched in March1996, the Rs. 10,101 crore Birla Sun Life Tax Relief 96 is one of the oldest ELSS funds in the industry. Currently, large caps account for 45.55% of the portfolio, with a 44.46% 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. With 38 stocks and the top 5 holdings accounting for 41.47%, the fund looks well-diversified. The fund invests 58.36% in the top three sectors, i.e., healthcare, finance and energy. The funds’ approach is aggressive, as the fund manager 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 fund has been a consistent outperformer over the years and has managed to give a very impressive return of 22.66%. In the past one year, 5 years and 10 years, the fund has earned returns of 6.6%, 5.81% and 9.98% respectively as against the category average of 4.19%, 4.79% and 9.28% respectively. The fund is benchmarked against the S&P BSE 200 TRI. The expense ratio is 1.92% and turnover ratio is 4%. 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.3,310 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, with large caps accounting for 74.26% of the portfolio at present. The most distinctive feature of the fund is that it follows a bottom-up investment strategy and always stays fully-invested. With 52 stocks and the top 5 holdings accounting for 34.61%, the fund looks well diversified. The fund invests 55.62% in the top three sectors, i.e. finance, energy and technology. The fund has given returns of around 20% since inception. In the past one year, five years and ten years the fund has earned returns of -6.89%, 1.89% and 9.45% respectively as against the category average of 3.95%, 4.73% and 9.18% respectively. The fund's returns in the last one year show a slowdown relative to the category. 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 winding up of six of its debt funds has lowered the morale of investors. The fund is benchmarked against NIFTY 500 TRI. The expense ratio is 1.98% and turnover ratio is 26.99%. The fund is managed by Mr. R. Janakiraman and Mr. Lakshmikanth Reddy since May 2016.

ICICI Prudential Long-term Equity Fund Gem

Reasonable valuation and growth expectations

At Rs. 5,970 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 74.95% of the portfolio. With 64 stocks and the top 5 holdings accounting for 30.77%, the fund looks well diversified. The fund invests 49.81% in the top three sectors, i.e. finance, energy and technology. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on and reasonable valuation and growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. The fund has earned a return of 18.55% since the fund’s inception. In the past one year, five years and ten years, the fund has earned returns of -0.76%, 4.93% and 9.92% respectively as against the category average of 3.56%, 4.86% and 9.27% respectively. The fund is benchmarked against NIFTY 500 TRI. The expense ratio is 2.08% and turnover ratio is 45%. The fund is managed by 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. 1075 crore, 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 38 stocks without being overly diversified and the top 5 holdings constitute 38.04%. 51.88% of the assets are invested in the top three sectors, finance, energy and technology. Even though the fund currently has a large cap bias with 70.4% allocation, it has not been hesitant about being heavily invested in mid and small cap 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 12.83% returns since inception. The one-year, five year and ten year returns are 8.35%, 6.86% and 11.5% respectively as against the category average of 4.47%, 4.95% and 9.3% respectively. The 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 2.41% and the portfolio turnover ratio is 103%. The fund is managed by 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 6083 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. It has a growth-oriented multi cap portfolio with 66.48% of the corpus in large cap stocks at present. There are 61 stocks in the portfolio. The top 5 holdings constitute 31.86%. 48.11% of the assets are invested in the top three sectors, finance, energy and healthcare. DSP BR Tax Saver fund has offered 12.2% returns since inception. In the last one year, five years, and ten years, the fund has earned returns of 3.79%, 6.87% and 10.69% respectively as against the category average of 4.47%, 4.95% and 9.3% respectively. The fund is benchmarked against NIFTY 500 TRI. The expense ratio is 1.9% and the portfolio turnover ratio is 148%. The fund is managed by Mr. Rohit Singhania since July 2015.

FUND FLAVOUR

August 2020

 

ELSS in a nutshell

 

Equity Linked Saving Schemes (ELSS), popularly known as tax saving mutual funds, are equity-oriented mutual funds. As per the SEBI regulations, ELSS funds have to invest at least 80% of their corpus in equity or equity related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act. These funds come with a mandatory lock-in period of 3 years in order to get tax-free returns. However, after the re-introduction of LTCG tax in the budget and taxation of ELSS in the hands of the recipient, returns from the investments in ELSS funds would be taxed. Long-term capital gains from equity mutual funds above Rs 1 lakh would be taxed at 10 percent without any indexation benefit. Investors typically make their tax-saving investments in the last three months of the financial year (January-March), known as tax-saving season. If you are opting to invest in this excellent tax saving instrument, you should do so early in the financial year when the Net Asset Value is generally lower. In a nutshell, ELSS is an excellent tax saving instrument in which one must invest. 

ELSS – One up on other avenues

ELSS investments have historically offered the greatest potential of creating wealth over the long term and these can be an excellent tool for achieving long term financial goals like children’s education fund and post-retirement corpus with contributions lower than its fixed income alternatives. The 3-year lock-in period in ELSS funds also reduces the redemption pressure for their fund managers during volatile markets. This allows their fund managers greater flexibility to take a more long term view while dealing with market volatility with respect to other open-ended funds.

 

ELSS  vs Tax Saving Fixed Deposit ( 5 year FD)?

ELSS has a 3 year lock-in period while tax saving FD has a 5 year lock-in.

Returns on ELSS: 11% - 17%.

Returns on Tax saving FD: 7.5%.

ELSS is better than 5 year FD because you get access to your funds in just 3 years, and annual historical annual returns have been much higher than regular tax saving FDs.

 

ELSS  vs Public Provident Fund (PPF)?

PPF is for creating a safety net on which to retire. ELSS is for creating wealth and enabling tax savings. PPF provides great returns if the investment is grown to allow interest to compound over a long term of 15 years. ELSS invests in equities which are riskier but more profitable in the short to medium term of 3 years (mandatory lock in) to 5 years. ELSS makes money now while PPF gives you a retirement pillow.

ELSS vs National Pension Scheme (NPS)?

Much like the PPF, the NPS is also for creating a retirement corpus. The point of ELSS is to invest in equities through a mutual fund scheme, with the added benefit of having your investment amount (up to Rs.1,50,000) exempted from taxable annual income. While the NPS is a long term investment, it allows for up to Rs.2,00,000 to be exempted from taxable income allowing for slightly higher savings depending on your tax bracket. If you wish to earn wealth in the short to medium term through equity mutual fund schemes ELSS is better. If you wish to create a decent sized retirement amount that you will only get on retirement NPS is better. Again, depending on the investor’s preference for either equity investing or retirement planning, ELSS or NPS are strong contenders on either side.

ELSS vs Sukanya Samriddhi Yojana (SSY)?

SSY or Sukanya Samriddhi Yojana Account is an investment scheme to enable unorganized workers, etc. to invest for the future of their female children. Deposit and withdrawal rules for this scheme differ greatly from a tax saving mutual fund investment scheme like ELSS.
While both are tax saving investments, ELSS is specifically designed for wealth generation, and SSY is specifically designed to enable savings. For a wealth generating investment that will also save Rs.1,50,000 from taxable income, ELSS is better.For an investment that is locked until your girl child is ready to get married or go to college, SSY is better.

ELSS vs Senior Citizens Saving Scheme?

Senior Citizens Saving Scheme or SCSS can be invested in by people above 60, or 55 in certain cases. Senior citizens can invest in ELSS as well - ELSS has a shorter 3 year lock in for funds.

Returns on ELSS are historically higher than those of SCSS.Both provide for up to Rs.1,50,000 to be exempted from taxation. ELSS is a better investment option than SCSS depending on goals.

ELSS vs Unit Linked Insurance Plan (ULIP)?

Both provide the same amount of Rs.1,50,000 to be exempted from taxation. ELSS is subject to LTCG Tax, ULIP is not. ULIPs are essentially insurance policies that use a part of the premium to invest and generate returns just like any other mutual fund scheme. ELSS funds are straight up equity market investment schemes with tax benefits. A standard life insurance policy, for example, functions better as a life insurance policy - providing greater benefits. Similarly, a standard mutual fund scheme investment provides better returns and is easier to navigate should you wish to exit or switch. ELSS is a better choice to fill the requirement of a tax saving investment scheme with a 3 year lock in, and nothing more.

ELSS vs National Savings Certificate (NSC)?

NSC has a mandatory 5 year lock in. ELSS has a 3 year lock in.

Average returns on NSC: 7.6%

Average returns on ELSS: 11% - 17%

Why invest in ELSS?

 

One: To beat the inflation

Most investment options available under Section 80C like Public Provident Fund, National Savings Certificate, etc. are government-backed investment options. These schemes typically offer modest returns of 7-8% per annum as these schemes invest the money in debt instruments, bonds, and government securities. That means investors would find it difficult to create wealth after beating inflation with these investments as the inflation rate is 7%. It is important to beat inflation to create wealth for long-term goals. On the other hand, ELSS invests the maximum amount of money in equities. It has given around 15-16% return over the past 10 years.

 

Two: Better Growth potential over a long-term horizon

An ELSS invests mostly in stocks. It is a well-accepted fact that equity has the potential to generate superior returns than other asset classes over a long period. Many studies and records justify this claim. So, if you want inflation-beating, better post-tax returns, you should invest money in ELSS funds. Suppose you start investing with Rs. 1000/- per month in ELSS Mutual Fund, after 15 years your absolute return will be Rs. 6,17,355/- assuming 15% CAGR.

 

Three: Shortest Lock-in Period

ELSS has the shortest lock-in period among the investment options available like PPF, NSC, etc. under Section 80C of the income tax act, 1961. An ELSS has a mandatory lock-in period of three years. It has a plus point that investment can be stopped even after one month. But one can withdraw money partially or wholly after the completion of 3 years lock-in-period.

 

Four: Minimise the Market Volatility

ELSS funds curb the volatility associated with the stock market. Many retail investors panic when they see their investments losing value significantly. But after a certain period 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.

 

Five: You can start an investment with a small amount of Rs. 500

Rs.500 is a more affordable amount for majority of the population.

Six: Reduce Taxable Income

Let us understand this with an example.

Usually, Bank FDs offer a 7-8% interest rate. In this case, let us assume that the interest rate is 8%.

Investment corpus = Rs. 5 lakh.

Time horizon = 5 years

Rate of interest = 8%

Interest earned = Rs. 2 lakh

So, you need to pay tax of 10% on the Rs. 2 lakh which equals Rs. 20000.

So, your absolute return after taxes = Rs 5 lakh + Rs. 1.8 lakh = Rs 6.8 lakh

In the case of ELSS,

Assuming that equity asset class gives a 15-16% return per annum,

Investment corpus = Rs. 5 lakh

Time horizon = 5 years

Rate of interest = 15%

According to Government rule, you need to pay 10% taxes as a long-term capital gains tax if your return is more than Rs. 1 lakh. So, you need to pay taxes on the rest. In this case, you need to pay 10% taxes on Rs. 4 lakhs which means you  need to pay = 10% of Rs. 4 lakh = Rs. 40000.

So, your absolute return after taxes = Rs. 5 lakh + Rs. 4.6 lakh = Rs. 9.6 lakh

 

Seven: Investing in ELSS is a lot easier now

Due to the advent of modern technology, an interested individual can invest in the stockmarket sitting from his or her home. All you need is an e-mail id, a PAN card, a document as an address proof, a passport size photograph and an internet connection. You can start investing within 24 hours of uploading the documents in the website of the stockbroker or the mutual fund house.

How to invest in ELSS?

 

Here is a step-by-step guide to investing in ELSS mutual funds:

Step 1 - Research: Finding the right ELSS fund to suit your needs is the first step in ELSS investing. There are thousands of ELSS funds on offer from hundreds of AMCs, banks, and fund houses.

Step 2 - Deciding the amount: The primary benefit of ELSS investments is the fact that they are tax-saving investments. A total of Rs.1,50,000 can be saved from taxation under Section 80C, but any amount over Rs.1,50,000 will not qualify for tax benefits. That being said, if the investor has an existing investment under Section 80C (like a 5-year FD, PPF, etc.) only the remaining amount (Rs.1,50,000 minus other Section 80C investments) will qualify for tax deductions. Example: If Mr. A has invested Rs.60,000 in a 5-year fixed deposit, he will only be able to claim tax benefits on Rs.90,000 of his ELSS investments under Section 80C (even if he has invested more than Rs.90,000 in ELSS). This is because Rs.60,000 + Rs.90,000 = Rs.1,50,000.

Step 3 - Investing: The standard process of investing involves endless hours of paperwork and trips to and from the fund house, AMC, or bank through which the investment is being made. Online portals offer a paperless, hassle-free, and efficient investment platform through which investments can be made almost instantly and tracked in a fully secure online environment.

Step 4 - SIP or Lump Sum: Once the fund scheme has been selected, the investor must decide between investing the amount in a large lump sum, or in smaller and regular installments. The main benefit of investing small amounts regularly through SIPs is rupee cost averaging - more units are purchased when the price is low and vice versa - making full use of market fluctuations to benefit the investor.

Step 5 - Redemption: Redemption of an ELSS scheme means selling off your invested interest in the scheme and earning any profit due from the investment. ELSS has a minimum lock-in period of 3 years to make use of tax benefits. The fund can be allowed to grow beyond 3 years as well in order to generate maximum returns.

How does ELSS SIP work?

It is simple - you invest a certain amount every month in this scheme, and it stays locked in for 3 years from the date of investment. So, if a person wanted to invest their full Rs.1,50,000 Section 80C quota into ELSS mutual funds through equal SIPs throughout the year, it would look something like this:

Rs.1,50,000 / 12 = Rs.12,500 per month

Rs.12,500 invested in April 2020 will be locked in till April 2023

Rs.12,500 invested in May 2020 will be locked in till May 2023

Rs.12,500 invested in June 20206 will be locked in till June 2023

And so on, until the investor has fulfilled the investment limit. The tax benefit in the above example can be claimed for 2020-2021.

When is the best time to invest in ELSS?

Investments in ELSS can be made at any time during the year. Most often, however, ELSS investments see a spike in popularity just before the tax filing season, as Indians scramble to reduce their tax liability by any means possible. Thus, those that invest in ELSS at the end of the financial year will definitely save on taxes, but will have almost neither the chance to benefit from any capital growth nor receive any dividends in that financial year. The best time to invest in ELSS is at the start of the financial year, i.e. after April 1. Since ELSS is an equity-oriented investment, it is a good idea to average out the rupee-cost by investing in ELSS every month through SIP. Thus, regular SIP investments in ELSS have the potential to provide the highest returns along with being a tax-saving investment.

Who should invest in ELSS?

Any individual or HUF can invest in ELSS. It is suitable for those who have enough knowledge and appetite to take risks and stay invested with a long term perspective. Young investors in the initial years of their professional career can invest with a long-term horizon. 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. ELSS funds also serve as a stepping stone to the world of equity schemes for many investors.  Once these investors get used to the volatility and witness their investments bounce back after a bad run in the stock market, they gain the confidence to start their investment in other equity mutual fund schemes. In fact, double-digit returns from ELSS convince many investors to take a serious look at equity mutual fund categories. With that, they learn the importance of investing in equity mutual funds to earn inflation-beating returns to create wealth over a long period.

Misconceptions about ELSS

Equity Linked Saving Scheme or ELSS may be the stepping stone to the stock market for many individual investors. However, many of them nurse a lot of misconceptions about these mutual funds that help investors to save taxes of up to Rs 1.5 lakh under Section 80C in a financial year. Here are a few common misconceptions shared by mutual fund investors.

ELSS funds are good only to save taxes

Sure, investments in ELSS mutual funds help you to save taxes under Section 80C of the Income Tax Act. However, that is not the only use of ELSS mutual fund schemes in your portfolio. Just like any other equity mutual fund schemes, you can use tax saving mutual funds to achieve your long-term financial goals. Remember, these schemes also invest their corpus in equity. Most of them follow a multi cap strategy. So, you can use them like any other equity schemes.

You should sell ELSS after three years

It seems, some investors just cannot see anything other than tax saving when they look at ELSS. All tax-saving investments permitted under Section 80C come with a mandatory lock-in period. ELSS mutual funds come with a mandatory lock-in period of three years, arguably the shortest lock-in period among the tax-saving options available under Section 80C. However, this does not mean that you have to sell your investments as soon as the mandatory lock-in period is over. You are free to hold on to your ELSS mutual funds as long as the scheme is performing well or you need the money to meet your goal.

You should invest in the same ELSS

Another common notion many mutual fund investors have is that they have to continue investing in the same ELSS fund to claim tax deduction year after year. Remember, the basic tax-saving premise is simple: your investments in ELSS funds qualify for tax deductions of up to Rs 1.5 lakh in a financial year. That means you are free to change or even invest in multiple schemes to claim tax deductions. There is no stipulation that you have to invest in the same scheme year after year to claim the tax deduction.

Recycling ELSS funds is a great strategy

Some investment geniuses believe that selling ELSS mutual funds immediately after their mandatory lock-in period of three years and investing it again in ELSS funds is a great way to save taxes. They say the strategy helps you to save taxes without making extra investments. However, the strategy often backfires. Many investors stop saving/investing separately for the tax saving purpose and end up spending the money. It can have a huge impact on your long-term wealth creation.

Dos and…

Quantitative Parameters:

1.      Performance and risk analysis

Analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.Under this, you need to rank the fund based on quantitative parameters like rolling returns across short-term and long-term periods, such as a 1-year, 3-year, and 5-year timeframe, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

2.      Performance across market cycles

You need to ensure that the fund has the ability to perform consistently well across multiple market cycles. Therefore, compare the performance of all the available ELSS vis-a-vis their benchmark index as well as category peers across bull phases and bear market phases. A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters

1.      Portfolio Quality

Adequate Diversification - The scheme should not hold a highly concentrated portfolio. It should have a well-diversified portfolio and the exposure to the top-10 holdings should be ideally under 50%.

Low Churn - Engaging in high churning can result in higher cost impacting the overall return of the scheme. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.

2.      Quality of Fund Management

You must consider the fund manager's experience, workload, and the consistency of the fund house. Therefore, assess the following criteria:

The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade.

The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is burdened with managing a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.

The efficiency of the fund house in managing your money - Research about the fund house's performance across schemes; find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.

Don’ts…

Don’t begin late: It is better to invest regularly through an SIP or STP in a tax-saving mutual fund to maximise returns. Also, it gives you enough time to do proper research about your investment. Remember, if you pick the wrong ELSS, you do not have the option of correcting it for the next three years. Start investing early, so that you have ample time to research about where to invest and how to invest in ELSS.

Don’t judge schemes on short-term performance: This point hold true for all the mutual fund schemes and not just ELSS. It is not advisable to invest your money based on six-month or one-year returns given by a particular scheme. The scheme that you are investing in should be a consistent performer for at least five years.

Don’t just look at the returns: Returns are primary but don’t just focus on returns when you are investing in an ELSS. Look whether its investment philosophy matches your view. For example, a scheme that takes a lot of risk to stay on top of the performance chart may not suit a conservative investor. The person would be better off with a scheme with conservative style of investment.

Don’t fall into the dividend trap: Many investors are lured by the dividend option when they invest in ELSS. The fact is that the dividend is actually paid to you from your own money. Unless you really need periodic income, don't opt for the divided option. If you want to create wealth, you should stick to the growth option.

Don’t invest just for tax saving: ELSS schemes provide you tax benefits but in the end, they are equity schemes. So you should remember that they can be risky, but they can be extremely rewarding. Whenever you are picking a tax-saving instrument like ELSS, be careful about the risk, lock-in period, returns, etc.

Don’t redeem after the lock-in period: The money is locked for three years in an ELSS. Some investors tend to pull their money out as soon as the lock-in is over. There is no need to pull the money out if the scheme is performing well. Also, since ELSS invests in equity, you should be prepared to stay invested for at least five to seven years.

Don’t switch funds every three-years: Some investors wait for the lock-in period to end and jump to another scheme. Don’t jump from one fund to another only because the other scheme is giving better return than your scheme. If your fund is not performing well, you need not always pull your money out. The returns depend upon many aspects, like the size of the fund. Find out the reasons for the underperformance. Only if the underperformance continues for long, while the markets are blooming, you need to rethink about your decision.

Don’t accumulate too many ELSSs: Some investors invest in a new ELSS every year. This leads to hindrance in managing the portfolio over a long period of time. Having more ELSSs in your portfolio will lead to over-diversification and the portfolio will become hard to monitor.

Current downtrend…

Equity-linked saving schemes (ELSS) are popular among those looking to save taxes as well as getting some equity exposure. Typically, ELSS inflows are higher during the last three to four months of the financial year as investors rush to make tax-saving investments before the 31 March deadline. This year, however, the inflows during this period have dwindled. According to data released by the Association of Mutual Funds in India (AMFIi) on 9 April 2020, net ELSS inflows between December 2019 and March 2020 is ₹3,834 crore, 36% lower than the net inflows during the same period in FY19, and 55% lower than the number in FY18. The net inflows in ELSS in this four-month period in FY19 was ₹6,001 crore and ₹8,440 crore in FY18. It may be noted that the deadline for making tax-saving investments was extended to June 2020.

 

So what explains the fall in ELSS net inflows in FY20?

 

Lower net inflows

It is likely that with increasing awareness about systematic investment plans (SIPs), investors are starting SIPs at the beginning of the new FY instead of investing a lump sum at the end of the FY. This could account for the slower sales in the ELSS category this year. However, this is unlikely. Net inflow in ELSS in whole of FY20 was lower than FY19— ₹8,187 crore in FY20 compared with ₹12,771 crore in FY19. Market volatility may be another reason for investors to stay away from ELSS as they have the equity component. But net inflows in equity funds jumped 52% to ₹24,343 crore between December 2019 and March 2020 compared to the previous year. So what else?

Confusion over tax regime: The year-end popularity may have reduced due to the budget announcement. Budget 2020 introduced a new optional tax regime which does away with most of the tax deductions, including the one available on ELSS investment under Section 80C of the Income-tax Act. Taxpayers have the choice of continuing with the old regime. The confusion about whether to opt for the new tax regime may have resulted in lower inflows this year. In March 2020, the net inflows in ELSS funds were 43% lower at ₹1,551 crore compared with ₹2,742 crore in March 2019. The new tax regime will be applicable from FY21.

Poor performance: This may be one of the major reasons why people are shying away from ELSS funds. Data from ICRA Research shows that ELSS funds were delivering double-digit returns on systematic investment plans (SIPs) in 2017 and 2018, but returns came down to single digit in 2019. The average three-year SIP returns of ELSS funds for 2017 and 2018 were around 14%, and only 6% in 2019. Many funds yielded negative three-year SIP returns in 2019 and 2020. Lower returns from ELSS funds over the last few years and the polarization of returns from only a few stocks in 2018 and 2019 may have contributed to the poor performance. As investors look at past returns, which are not very attractive for ELSS funds, the inflows may have been lower.

Allocation plays a role

Because of the lock-in (of three years), fund managers in ELSS funds generally take high exposure to mid- and small-cap stocks, which performed badly in the past two-three years. This has resulted in the poor performance of these funds. As of February 2020, the average large-cap allocation in tax-saving funds was around 65%, while the rest was allocated to mid- and small-cap stocks, according to data provided by Value Research, an investment research company. Some ELSS funds have an even higher exposure to mid- and small-cap companies. As of February 2020, seven out of 42 ELSS funds had over 50% exposure to mid- and small-cap stocks. The returns of ELSS funds are in line with that of multi-cap funds. The 10-year category average return from multi-cap funds is 7.78% compared with 7.83% from ELSS funds, as per Value Research data. Some of the funds also change the allocation of stocks of different market capitalizations, as per the fund manager’s view of the market. For example, Tata Tax Saving Fund had increased its allocation to large-cap stocks from 52% in February 2017 to 80.31% in February 2020. The Fund manager followed a bottom-up strategy. So, the increase in allocation is because of the respective stock picks. However, the Fund Manager also ensures that the large-cap exposure does not go below 50%.On the other hand, the exposure of PGIM India Long Term Equity Fund to large-cap stocks has gone down from 82% in February 2017 to 70% in February 2020. It was a deliberate move to lower the large-cap allocation. After the correction in mid- and small-cap stocks that started in February 2019, they looked attractive and the Fund Manager decided to increase the exposure. These funds are among those that significantly changed their market cap allocation between February 2017 and February 2019.

The bottomline…

Today’s winner may not remain the winner for tomorrow. Top 10 ELSS funds or Top 5 ELSS funds of today may not remain the same after 3 or 5 years. Therefore, it is better to diversify across 1-3 ELSS schemes rather than relying on only the best performing ELSS schemes. To avoid duplication, choose ELSS schemes with varying portfolio allocations across different sectors, market capitalisation and stock holdings. And, in case the returns are low even after the 3-year lock-in period, continue with the fund once the lock-in period ends. Link your ELSS investment to a long term goal and not invest merely to save tax. Invest in ELSS only if you can bear short-term volatility in the equity market, hold a high-risk appetite, and have an investment time horizon of at least 3 years. Investments in equities take time to grow and generate meaningful returns. This means that there can be short-term underperformance. As a result, you may have to hold on to your investment beyond the mandatory lock-in period. A number of ELSS have successfully created wealth for investors outperforming their respective benchmark indices and category average across time frames. A long-term investment in ELSS is a more prudent choice as compared to other fixed-income products. But as with all market-linked investments, there is a risk. Go for an ELSS whose portfolio matches your risk profile.