FUND FULCRUM (contd.)
November 2010

Regulatory Rigmarole

The Securities and Exchange Board of India (SEBI) has relaxed the norms on merger and consolidation of mutual fund schemes. The circular reverses the June 2003 ruling of SEBI that viewed any merger or consolidation as change in the fundamental attributes of the surviving scheme and hence made it mandatory for fund houses to follow certain procedures laid down in this regard. The recent SEBI order states that the mutual fund will have to “demonstrate that the circumstances merit merger or consolidation of schemes and the interest of the unit holders of the surviving scheme is not adversely affected”. After approval by the boards of AMCs and trustees, mutual funds will have to file such a proposal with SEBI. The regulator would then communicate its observations on the proposal. The letter to unit holders would be issued only after the final observations communicated by SEBI have been incorporated and final copies of the same have been filed with SEBI. The mutual fund industry may soon see consolidation of its plethora of schemes as SEBI makes the process easy.

According to SEBI, purchase and redemption of mutual fund schemes can now also be done through the clearing members of the registered stock exchanges, apart from the existing distributor facilities. Depository participants of registered depositories are now permitted to process redemption requests of units held in de-materialised form. Once the units are purchased or redeemed, the AMC would credit the units or pay the proceeds to the broker/clearing member's pool account. The brokers/clearing members would in turn forward it to the respective investor. This would end the obligation of the AMCs to pay the individual investors. One of the fundamental problems in the industry was that the clearing process was not centralised. This move is a lot better for the industry from an operational and settlement point of view. Close-ended funds would not fall in this category since they are anyway traded on the exchanges. SEBI further said that exchanges and depositories should provide investor grievance handling mechanism to the extent they relate to disputes between their respective regulated entity and their client and should also monitor the compliance of code of conduct for intermediaries of mutual funds.

Retail investors in mutual funds will have to compulsorily follow the KYC (know-your-customer) norms irrespective of their investments from 1 January, 2011. Till now, retail investors were not required to go through KYC procedures for investments up to Rs 50,000. The same rule was applicable for NRIs (non resident Indians) and other non-individual investors till September 2010. However, from October 1, 2010, KYC is mandatory for NRIs and other non-individual investors for any investment amount. CDSL Ventures Ltd. (CVL), a wholly owned subsidiary of Central Depository Services (India) Ltd (CDSL), has been assigned the task of processing the KYC norms. AMFI had also allowed distributors to carry out the task on behalf of their investors and then submit all necessary documents with CVL. If the documents are found in order in accordance with KYC requirements, CVL will issue an acknowledgement to such investor to the effect that he is KYC compliant. On the basis of the acknowledgement, investor routing his investment through distributors will be allowed to make investments without being asked to go through KYC process again through CVL. KYC norms were first implemented from 1 February, 2008, for all investors investing Rs 50,000 or more in mutual funds to comply with the Prevention of Money Laundering Act 2002.

The Association of Mutual Funds in India (AMFI) has asked fund houses not to accept third party payments after November 15, 2010, barring a few exceptions. Third-party payments would only be accepted in case of payment by “parents/grand-parents/related persons on behalf of a minor for a value not exceeding Rs 50,000 (each regular purchase or per SIP installment); payment by employer on behalf of employee under systematic investment plans (SIP) through payroll deductions and custodian on behalf of an FII or a client.”

In compliance with AMFI Best Practice Guidelines Circular dated October 22, 2010, fund houses offer its investors the facility to register multiple bank accounts in their folios to receive redemption / dividend proceeds with effect from November 15, 2010. While individual and Hindu Undivided Family (HUF) investors will be allowed to register up to 5 bank accounts, non-individual investors will be allowed to register up to 10 bank accounts. The unit holder can choose any one of the registered bank accounts as default bank account. However, in case a unit holder does not specify the default bank account, the Fund reserves the right to designate any of the registered bank accounts as default bank account. Unit holders may also note that the registered bank accounts may also be used for verification of pay-ins (i.e. receiving of subscription funds) to ensure that a third party payment is not used for mutual fund subscription. The following documents will be required for the registration/change of the bank account(s) mandate: (i) A cancelled original or self attested copy of cheque leaf with the account number and name(s) of the account holders printed on the face of the cheque. (ii) Alternately, the investor can also submit a certificate from the bank or the bank account statement or a copy of the bank pass book.

According to SEBI, redemptions in interval funds will only be allowed during specified transaction periods. The current option of redeeming units on any business day, subject to applicable loads, will no longer be available. The specified transaction period will consist of a minimum of two working days. The SEBI circular also mandates that the minimum duration of an interval period in an interval scheme/plan must be 15 days. Also, investments by these schemes will only be made in those securities which mature on or before the opening of the immediately following specified transaction period. According to the current regulations, there is no restriction on the tenure of the securities in which an interval scheme can invest. This, coupled with the daily redemptions, was resulting in an asset-liability mismatch. The circular makes it mandatory for the units of interval schemes to be listed. The Asset Management Companies will ensure compliance from the date of next specified transaction period or April 1, 2011 whichever is later.

With respect to the Net Asset Values (NAVs) of liquid schemes, SEBI has specified that the closing NAV of the previous day will be applicable if application is received before 2 pm (as against 12 noon at present) and funds are also available for utilisation before the 2 pm cut-off time. For applications received after 2 pm on a day and when funds are available for utilisation before the cut-off time, the closing NAV of the day of application will be applied for that purchase. In case of applications received at a time when funds are not available for utilisation, the closing NAV of the previous day on which the funds are available for utilisation will be applied for the purchase. The entire amount of the application must also be credited to the bank account of the respective scheme before the cut-off time. The funds to be allotted should be made available before the cut-off time by the respective scheme. This is to check on investing on borrowed money. Earlier, several fund houses were seen investing in debt papers by resorting to short-term borrowing even before the fund got credited into the account. This would reflect in the asset-liability mismatch. With the new ruling, we would have more bank accounts with direct credit facility which will ensure fund transfers do not take time. In a way, this move will make systems more effective and reduce operational risks.

The way investors are making a beeline exiting from funds in a rising market to book profits is hurting AMCs. The only way to survive in these tough times is to woo investors for the long-term. Having sold the idea of long-term wealth creation through systematic investment plans (SIPs), AMCs are now deploying new ways to retain investors by introducing exit loads and turning to capital protection funds. Take for instance the newly launched Reliance Small-Cap Fund; it levies a 2% exit load on redemptions in the first year and 1% for withdrawals made in the second year. Investors are being coerced to remain in this fund for the long-term. Capital protection funds are for investors who are conservative and prefer their investments to be in the form of bank deposits. There is potential upside and virtually no downside to these funds. All said and done, the investor exodus from mutual funds is a temporary phenomenon. Solid foundation laid at educating investors about the powerful potential of this investment vehicle will take the industry to great heights, albeit at a slow and steady pace.

FUND FULCRUM
November 2010

After a rise in average assets under management (AAUM) for two straight months, the fund industry saw its assets fall in October 2010. The month was tough for the industry, which recorded a poor performance on all fronts – average assets, net assets, and outflow from equity schemes. According to the Securities and Exchange Board of India (SEBI) data, the industry’s AAUM stood at Rs 6,98,852.71 crore on October 31, 2010 a decline of 2.02% compared with the previous month’s Rs 7,13,281.23 crore. Moreover, net assets slipped for the second consecutive month by 1.66% to Rs 6,46,395.40 crore from Rs 6,57,313 crore in the previous month. The equity segment continued to see net outflows for the fifth month in a row at Rs 2,869 crore, according to data from the Association of Mutual Funds Association (AMFI). The figure crosses the Rs3,000-crore mark if equity-linked saving schemes are counted. This takes the total redemption over the past ten months to a whopping Rs 17,000 crore. The sales of new equity schemes stood at a paltry Rs106 crore (Baroda Pioneer PSU Equity Fund and Reliance Arbitrage Advantage Fund were launched) while sales of existing equity schemes was Rs 4,914 crore in October 2010. But last month, redemptions from existing equity schemes stood at Rs 8,413 crore meaning that equity mutual funds suffered Rs 2,900 crore of net outflow in October 2010. Nevertheless, compared with September 2010, when the equity segment saw a net outflow of over Rs7,000 crore, the redemption pressure eased a bit. October was an uncertain month. There was pressure from investors who had put in money during earlier peaks. Cash for the Coal India offer had to be generated. Overall net outflows were Rs5,742 crore in October 2010, while income funds saw an outgo of Rs5,305 crore. The liquid & money market segment saw net inflows of Rs2,283 crore, while gilt funds and gold exchange-traded funds registered inflows of Rs117 crore and Rs220 crore, respectively.

In the retail investor category, equity funds reported a net outflow (more money went out than came in) of Rs2,552.54 crore between August 1, 2009 and July 31, 2010. In the HNI category, they saw a net inflow of Rs1,096.92 crore (more money came in than went out). In the same period, the Bombay Stock Exchange’s benchmark Sensex index rose 25%. Banks and large national and regional distributors seem to have churned their customers the most. Equity funds reported a net outflow of Rs1,275.93 crore in the bank channel, and Rs1,483.65 crore in the large national and regional distributor channel between August 1, 2009 and July 31, 2010. Curiously, although independent financial advisors constitute a hefty 29% of the total distribution base of the mutual fund industry (banks and national distributors constitute 29% and 36%, respectively), this channel saw a nominal net outflow of just Rs.185.35 crore in the same period

The retail investor exodus from mutual funds continues unabated even in October 2010 as most schemes witness money exiting and drop in folio numbers. Equity funds witnessed folio numbers shrink by 3.52 lakh to 3.91 crore in October 2010. Overall, the number of investors’ account dropped by 3.62 lakh to 4.68 crore in October 2010 compared with 4.71 crore in September 2010. Even balanced funds witnessed a fall in the number of folios by 38,113 to 27.58 lakh during the month. Overall, in October, equity diversified funds (including tax-saving funds) observed a net outflow of Rs 3,063 crore. Units worth Rs 9,227 crore were redeemed during the month, while new sales accounted for Rs 5,164 crore. The redemptions were mainly on account of profit booking by investors. With the market indicators touching the highs of January 2008, many investors who had been stuck in the market since 2007 preferred to exit to recover the notional losses. Gold and other ETFs had an increase in investors where the account rose by 13,000 while the same increased by 24,000 in schemes of debt category.

Piquant Parade

AMFI would declare the average asset under management of the mutual fund industry on a quarterly basis instead of the current practice of declaring it on monthly basis. The AAUM for each quarter (90 days average) will be computed and uploaded on AMFI Website on the first working day of the following month of every quarter, effective from quarter ending December 31, 2010. There has been a demand from a majority of fund houses to stop declaring monthly AAUM as it gave a wrong picture of the industry assets. Around 75% of the mutual fund industry's assets is accounted for by institutions, who park their surplus cash for short periods, often as short as a few days, in debt funds. This combination of large size, and large & frequent investments and redemptions means that the impact of institutional transactions overshadows the trends in retail segment. It has been observed that in quarter-ending months, institutions pull out of mutual funds resulting in sharp drop in average AUM of the industry in those particular months. However, fund houses can upload their monthly AAUM on their websites. This follows a consensus move by the industry, which wants to put an end to this monthly “AUM race. Instead, building long-term, stable, and healthy businesses should be the underlying motive.

Concerned that mutual fund schemes are becoming too complex for average investors, SEBI has asked several asset management companies to rework some proposed new schemes and file offer documents afresh. More than a dozen new fund offer (NFO) prospectuses of leading mutual fund houses such as Reliance Mutual Fund, ICICI Prudential, Birla Sunlife Mutual Fund, Kotak Mutual Fund, Tata Mutual Fund, and Benchmark Asset Management are awaiting approval from the market regulator. The regulator is going slow on approving structured mutual fund schemes where instead of investing in equities and debt in a pre-determined ratio, the fund manager is given the flexibility to adopt complex strategies. Structured funds require investors to take active calls on market direction. SEBI is also discouraging fund houses from launching flexi cap, thematic funds and also schemes similar to the ones they already have.

Birla Sun Life Mutual Fund has launched a mobile platform called 'Mobile Investment Manager' in association with MCHEK India Payment Systems. The service is available to existing investors of Birla Sun Life Mutual Fund with the benefit of managing their investments from the convenience of their mobile phone. On this mobile platform, an investor can seek portfolio information, make additional purchases, register for SIPs and also make switches and redemptions. The launch of 'Mobile Investment Manager' assumes great significance for Birla Sunlife Mutual Fund given the rapidly increasing number of mobile users and the mobile penetration, which is currently above 500-million. It allows users, especially those who are always on the move, the freedom to transact from anywhere and at anytime.

to be continued…

NFO NEST
November 2010

NFOs have started making a slow comeback, with debt funds far outstripping the number of equity funds featuring in the November 2010 NFONEST…

JPMorgan India Capital Protection-oriented Fund
Opens: November 12, 2010
Closes: November 26, 2010

JP Morgan Capital Protection-oriented Fund is a 39-month closed-end income scheme, which will mature on March 6, 2014. The fund is rated AAA (ind) (SO) by Fitch Ratings and the fund will only invest in AAA rated papers. The investment objective of the scheme is to generate returns and reduce interest rate volatility, through a portfolio of fixed income securities that are maturing on or before the maturity of the scheme along with capital appreciation through equity exposure. The scheme will allocate 80% to 100% of assets in debt and money market instruments with medium risk profile. It will further allocate upto 20% of assets in equity and equity linked instruments with high risk profile. Benchmark indices for the purpose of performance comparison will be 15% BSE 200 + 85% CRISIL Short Term Bond Fund Index. Mr. Nandkumar Surti and Mr. Namdev Chougule will manage the fixed income portion of the scheme. Mr. Harshad Patwardhan and Mr. Amit Gadgil will manage the equity portion.

ICICI Prudential Regular Savings Fund
Opens: November 15, 2010
Closes: November 29, 2010

ICICI Prudential Regular Savings Fund, an open ended income fund, aims at providing reasonable returns, by maintaining an optimum balance of safety, liquidity, and yield through investments in a basket of debt and money market instruments with a view to delivering consistent performance. The scheme will allocate up to 100% of assets in debt securities (including government securities) with maturity of more than one year and in money market securities. Debt securities include securitized debt (single loan and / or pool loan securitized debt) of up to 50% of the portfolio. It also includes derivative instruments to the extent of 50% of the net assets as permitted by SEBI. The scheme's performance will be benchmarked against Crisil Composite Bond Fund Index. The scheme will be managed by Mr. Chaitanya Pande.

Pramerica Equity Fund and Pramerica Dynamic Fund
Opens: November 19, 2010
Closes: December 3, 2010

Two funds – Pramerica Equity Fund and Pramerica Dynamic Fund – have been launched by Pramerica Mutual Fund. Pramerica Equity Fund will be an actively managed diversified portfolio, which will invest in equity and equity-related securities, including derivatives, debt and money market instruments. This equity fund, with a large-cap bias, will follow two investment approaches. The sector-rotation approach will involve identifying the right sectors for investment, while the special situation approach is a bottom-up strategy in identifying companies. Pramerica Dynamic Fund is a dynamic asset scheme in which investments will be managed by a tool, Pramerica DART (Pramerica Dynamic Asset Rebalancing Tool), developed by Pramerica Mutual Fund. The tool allocates assets to the fund by measuring the relative attractiveness of the markets and makes an optimum selection of debt and equity. It reduces the exposure to equity instruments when the markets are on a high and increases the equity-exposure when the markets are down. Thus, it makes an appropriate selection of assets based on market conditions. The scheme will allocate up to 100% in equities with a minimum of 30% in equities and the balance in debt and money market instruments. The two schemes will be managed by Mr Ravi Gopala Krishnan and Mr. Mahhendra Kumar Jajoo, Executive Director and CIO, Fixed Income.

Sundaram Capital Protection-oriented Fund Series II
Opens: November 22, 2010
Closes: November 30, 2010

This three-year closed-end fund, the second in the series, aims at providing income and minimising capital loss by investing in a portfolio of fixed income securities. A maximum of 20% of the assets can be invested in equities. The fund is AAA (SO) rated by CRISIL. The fund is benchmarked against the CRISIL MIP Blended Index. Dwijendra Srivastava is the fund manager for the debt portion and S. Krishnakumar is the fund manager for the equity portion.

Reliance Banking and PSU Debt Fund, Sundaram Money Opportunities Fund, Reliance Fixed Horizon Fund, DWS 3 in 1 Fund, IDFC Savings Scheme, IDFC Small Cap Equity, Canara Robeco Suraksha Fund, Axis Midcap Fund, Birla T 20 Fund, and Principal Dynamic Bond Fund are expected to be launched in the coming months.

GEM GAZE
November 2010

34 ELSS Funds in all with 14 having a track record of five years and more – exhibited lower divergence between the best and worst in the category, compared with diversified funds. After a prolonged phase of underperformance, tax-savings funds are slowly catching up with their open-end diversified peers. The one-year average return of ELSS is, in fact, one percentage point higher than the diversified fund category. Besides, barring a couple of ELSS funds, almost the entire universe has outperformed the return of bellwether index Sensex.

The towering tycoons in the tax-saving space have retained their GEM status with two new GEMs, Religare Tax Plan and DSPBR Tax Plan, entering the hall of fame.

Magnum Taxgain Fund Gem
Leading light…

The true leader in its class, SBI Magnum Taxgain the grand old man of ELSS Funds, was launched as early as March 1993. It is also credited to be India’s largest ELSS scheme with over 17 lakh investors in its kitty and net assets of Rs 5996 crores. This fund is a behemoth that has ‘A’ group shares as its top holdings, and a large cap heavy portfolio. The scheme is well-diversified, where allocation to top five holdings as well as sector bets is highly rationalised. The portfolio is adorned with 68 stocks and the top 5 holdings accounting for a mere 18%. The top three sectors in which the fund has exposure are energy, financial services, and engineering. The fund has a growth-oriented large cap portfolio with 75% invested in large-cap blue-chip companies. The fund's returns since launch have been 19.89%. One-year return is 31.67% as against the category average of 38.9%. With standard deviation of 22.13 the fund ensures safety of returns. The expense ratio is 1.78% and the portfolio turnover ratio is 37%. This is a good fund for investors who choose diversification and safety over returns.

HDFC Tax Saver Fund Gem
Packing a punch…

Launched in June 1996, HDFC Taxsaver is one of the oldest open-ended tax-saving funds in the industry with an AUM of Rs 2885 crores. It is more than 13 years old and still packs a punch. This fund from one of the finest fund houses in the country is a champion in both good and bad times. The top three sectors are financial, energy and healthcare. The fund sports a large cap growth-oriented portfolio, with more than 60% of the funds in large caps. The fund is sufficiently diversified with 53 stocks and the top 5 holdings account for 24%. Smart stock picks and sector moves over the last 10 years has shown its ability to manage downside as well as riding upside. The fund is well-known for protecting investor’s money during bear markets or severe downturns as was proved during 2008. Return since launch is 34% which is an unmatched achievement in itself. HDFC Tax Saver Fund has given returns of 34.39% in a 14 year SIP and 31.92% in a 10 year SIP. The fund has consistently outperformed its category average with one-year return of 46.43% as against the category average of 38.9%. The returns since launch have been an impressive 35.61%. The expense ratio is 1.86% and the portfolio turnover ratio is 26.01%.

Fidelity Tax Advantage Fund Gem
Awe-inspiring awards…

Fidelity Tax Advantage Fund, in existence since February 2006, has been a consistent performer and ranked Crisil-CPR 1 over the last seven quarters ending December 2009. Funds ranked Crisil-CPR 1 form a part of the top 10 percentile of Crisil’s ranked universe. The fund received the ICRA 7-Star Gold Award 2010 and the CNBC TV18 - CRISIL Mutual Fund of the Year Award in the Equity Linked Savings Schemes (ELSS) category. The fund follows a bottom-up stock picking approach, focusing on a company’s core strengths, and stock selection is backed by thorough in-house research. The fund’s ideal core investment is a “go-anywhere” approach. In other words, the fund strategy is to invest in stocks without any bias towards market capitalisation, sector and trend. However, unlike the implication of a go-anywhere approach, the volatility in returns is low. To a large extent this has been possible due to a cap of 4% on single-stock exposures. The level of diversification and general aversion to volatile sectors paid off for the scheme in 2008, where it emerged as amongst the least to regress. There has hardly been any churn in the top 10 holdings of the scheme, which is encouraging. The top three sectors are financial, energy and technology. It has a high exposure to the financial services sector—about 27% at present. This is because the fund manager feels that banks still have a wide market to penetrate.70% of the assets are in large caps with a growth-oriented large cap portfolio. The portfolio is diversified with 24% in top 5 holdings. The portfolio has around 60 to 70 scrips, which could be a challenge going ahead as the fund’s size is already Rs 1,296 crore. Returns since launch in Jan 2006 is 20.55%. One-year return is 47.46% as against the category average of 38.9%. The expense ratio is 2% and the portfolio turnover ratio is 25%.

Sundaram Tax Saver Fund Gem
Fiery Flexibility…

The feather in the cap for the Rs 1582 crore scheme has been its ability to contain losses in 2008, where it outperformed its benchmark and category by losing much less. The fund invests in stocks across market-cap categories with a sizeable allocation to large-caps. Large caps constitute 66% of the portfolio which has a blend of growth and value stocks. Top five holdings constitute 22% of the portfolio with a total of 41 stocks. The fund follows both top-down and bottom-up approach for making investments. The fund focuses its investments towards companies which have macro elements like infrastructure spending, restructuring, skilled labour, etc. What distinguishes Sundaram Tax Saver from others in the category is its active churn of holdings. The average holding period in any leading stock is not more than one to three months. Diversification among giant, large, and midcap companies makes it a good fund. It is a little aggressive fund with 55% portfolio in just 3 sectors of energy, finance and construction, betting on India’s future. A very flexible fund known for its adaptability with any situation makes it suitable for every kind of investor. The fund has an impressive track record over an eleven-year period with annual returns of 23.36% since launch November 1999. Though it outperformed its category average in the three and five year periods, its one year return has been 30.24% as against the category average of 38.9%. The expense ratio is 1.96% and the portfolio turnover ratio is 237%.

Canara Robeco Tax Saver Fund Gem
Safe sailing …

One of the oldest tax saving funds with 16 years of good track record with an AUM of Rs. 220 crore, its ability to sail through the down time and steer ahead in the upturn is quite remarkable. The top three sectors are finance, energy, and services. The fund is well-diversified with only 20% assets in the top 5 holdings. 58% of the assets are in large cap stocks. The fund has diversified its portfolio into 52 stocks across various sectors with top 5 sectors (financial, energy, services, technology and healthcare) constituting 74.15% of the total portfolio. Canara Robeco Equity Tax Saver is well-diversified and has a good mix of large- and mid-cap stocks. Return since launch is 16.69% which is decent enough in such a long term. Mind boggling 43.19% return in the past one year as against the category average of 38.9% shows that some great potential is building in this fund. The fund has performed well, both in rising markets (2009) and falling markets (2008) as compared to its category average. The expense ratio is 2.38% and the portfolio turnover ratio is 51%. The fund is a safe bet, typically for conservative investors.

Religare Tax Plan In
Fresh Fire…

Religare Tax Plan is a relatively new kid on the block, having just completed three years. With a corpus of just over Rs 100 crore and fund manager Vetri Subramaniam’s good track record, the fund did well in both the falling markets of 2008 and rising markets of 2009. The top three sectors are finance, energy, and FMCG. The fund is well-diversified with 53 stocks and the top five holdings constitute 22%. Large cap stocks make up 60% of the portfolio. Return since launch in December 2006 is 18.64% and the one year return is 43.34% as against the category average of 38.9%. The expense ratio is 2.49% and the portfolio turnover ratio is 43%.

DSPBR Tax Saver In
Effective effervescence…

DSPBR Tax Saver has a fund corpus of around Rs 941 crore and follows a flexi-cap investment strategy — it invests in large- and mid- and even small-cap stocks, depending on the market fancy. The churning of stocks too is quite aggressive, with turnover ratio of around 89% which may subject the fund to volatility in returns. Banking sector, a favoured sector in the past rallies, does figure as the top sector in the recent portfolio with energy and technology occupying the second and third slots. Its top 5 sector picks constitute both growth-oriented and defensive sectors and constitute 17% of the portfolio. The fund has a growth-oriented multi cap portfolio with 53% of the corpus in large cap stocks. There are 72 stocks in the portfolio. Since inception in December 2006, DSP BR Tax Saver fund has offered 18.8% returns and 42.57% for the last one year as against the category average of 38.9% which goes to prove that this is an effective fund with a good fund manager in the backseat. The expense ratio is 2.08% and the portfolio turnover ratio is 89%.

FUND FLAVOUR

November 2010

The versatile ELSS Funds…

ELSS Funds are variants of diversified equity funds. Besides being equipped with the typical features of diversified equity funds, they offer tax advantage. You can make your investment tax deductible under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1 lakh. The ELSS funds have a lock-in period of three years. They are the gateway through which novices to investments get a taste of equity. ELSS Funds are one of the best tax saving options and an excellent mode of investment.

Saving taxes and building wealth too…

Why is ELSS the best investment strategy for tax savings?

• Generates highest returns as compared to other investing avenues.
• Provides a lock-in period of three years which is the minimum for any tax saving avenue.
• Lock-in enables long term investing in equity markets.
• Promotes disciplined investing by enabling SIP of Rs 500 per month.
• Dividend option enables liquidity since you get tax-free dividends during the tenure.
• Provides dual benefit of capitalising on superior returns as well as tax saving.

Advantage “ELSS”

The added and unique advantages of ELSS Funds have been enumerated below:

Cost conscious

According to the data from mutual fund rating agency, Value Research, 14 ELSS schemes had an expense ratio of 2.5% and 19 others had a lower expense ratio. Of the top 10 ELSS schemes seven had a ratio lower than 2.5%, while the remaining three had a ratio of 2.5%. This kind of lower cost is good for a long-term investor who stays invested in the scheme for several years.

Old is gold

The last ELSS scheme was launched in October 2005 and the first scheme came to the market in March 1993. So, the youngest ELSS fund is five years old.

Low Performance Differential

In the last one year, the best performing ELSS scheme returned 127% and the worst performer returned 63%. In comparison, the difference between the worst and best performing equity diversified funds was a whopping 138%. When compared over a period of two or three years, returns given by the best and the worst performing ELSS were 24% and 22% per annum, respectively.

Match making

There are more than 30 ELSS schemes available in the market today. Choice of ELSS funds depends upon your risk profile and priorities. You should make an investment decision based on overall financial planning.

Large Cap ELSS Funds: These funds invest predominantly in the large cap companies. While this may mean muted returns when the markets are rising, it may also mean a limited downside when the going gets tough. Franklin India Tax Shield and SBI Magnum Tax Gain are a few examples of this type of fund.

Growth ELSS Funds: These funds have about 30% exposure to mid-caps, 10% to small-caps & the rest in large caps in their portfolio. Hence, they may give a higher return in rising markets. Sundaram BNP Paribas Tax Saver is a good option in this category.

Mid-cap ELSS Funds: No pain, no gain. These funds have a sizeable exposure to mid-caps and small-caps. This aggressive investment style can pay rich rewards. Sahara Tax Gain and HDFC Tax Saver are good examples of such funds.

Small Cap Funds: Small-cap stocks can act like performance enhancing drugs. In the above discussed types, the maximum allocation to small-caps is 12%. However, Taurus Tax Shield has invested almost 30% in this high-risk zone. This can be very rewarding when the going is good, but a dream run can easily become a nightmare. Taurus Tax Shield has given 98.01% returns in last one year.

ELSS is a great instrument for tax planning which also ensures good returns. But investment should be carefully planned and you should devote sufficient time in selecting the right fund. GEM GAZE that blossoms next week will aid you in the process.

Risky route

The basic risk with ELSS funds is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital. If you choose an ELSS fund which has delivered excellent performance in the past years and has a track record of consistent performance, and invest regularly for the long term, the chance of you losing out would be negligible.

…to go the dinosaur way?

All said and done, there is a greater risk looming large…the possible extinction of this venerable instrument, thanks to the DTC, which comes into effect from April 1, 2012. ELSS Funds will no longer get tax exemption under DTC. It is this tax exemption that sets it apart from equity diversified funds and gives it the added advantage. ELSS Funds, at present, is an endangered species. Hopefully, the laws are altered before such an unfortunate calamity befalls.