FUND FULCRUM (contd.)

November 2015

Mutual fund investments in stock markets have begun to cool in the past two months. After investing an average of Rs 8,200 crore each in the first six months of the financial year, mutual fund managers invested just an average of Rs 3,600 crore in October 2015 and November 2015. The drop in investment comes amid weakness in stock markets due to earnings disappointment and concerns around delay in reforms. In addition, gross redemptions from equity schemes have been on the rise, providing less leg-room for fund managers for fresh investment in stocks. In October 2015, fund managers invested less than Rs 3,000 crore, while so far this month they have bought (net of sales) shares worth around Rs 4,200 crore. Mutual fund investments are seen as a key support to the market at a time when foreign flows this year are on course to be the lowest in five years. So far this year, mutual funds have invested Rs 65,000 crore in Indian stocks. In comparison, foreign institutional investors (FIIs) have invested just Rs 21,351 crore during the same period. In 2014, FIIs had pumped in Rs 97,054 crore. The benchmark indices this year are down six per cent after a 30% rally last year. Till October 2015, the gross sales in the equity segment have surpassed Rs 1 lakh crore. However, at the same time what is worth noticing is the fact that gross redemptions too are about Rs 44,000 crore - a sizeable figure. New fund offers (NFOs) have considerably slowed down as well.

The National Securities Depository Ltd (NSDL) and the Central Depository Services Ltd (CDSL) allow investors to deposit securities by opening an account. The securities such as shares, debentures, bonds of investors are held in electronic form (dematerialised form) at the depositories. The two depositories, CDSL and NSDL, witnessed an addition of about 1.8 lakh investor accounts during September 2015. With 1.65 lakh more dematerialised (demat) accounts in October 2015, overall 17.35 lakh new investor accounts have now been opened in the past 12 months (till October 31, 2015), according to latest data available with the depositories and market regulator SEBI. At the end of October 2015, the total number of investor accounts at NSDL stood at nearly 1.42 crore, up from 1.41 crore registered till September-end this year. This implies an addition of 68,809 accounts in October 2015. CDSL reported 1.02 crore investor accounts till October-end this year, an addition of about 96,556 accounts in the month. According to information available with NSDL, an average of 3,589 accounts has been opened per day on the depository since November, 1996.

Regulatory Rigmarole

In a bid to expedite scheme mergers, SEBI has asked AMFI to prepare a report on schemes having similar fundamental attributes and persuade fund houses to merge such schemes. SEBI norms say that two schemes can be merged if the fundamental attributes of surviving scheme is not tinkered with. Fund houses are allowed to merge schemes keeping investors’ interests in mind. They have to get an approval by the board members and trustees. Fund houses then file a proposal with SEBI seeking such a merger. After getting an approval, AMCs give an exit option to investors. Typically, fund managers decide which schemes need to be merged. Usually, non-performing schemes or those which have a small AUM are merged with bigger funds. The shares held by the scheme which is getting merged are transferred to the surviving scheme. This results in increase in the number of units, AUM and the investor base of the surviving scheme. Despite the Budget 2015 having done away with tax liability on scheme mergers, the industry has not seen many scheme mergers so far. In addition, the government has reduced securities transaction tax (STT) from 0.25% to 0.001% in 2013. There could be a variety of reasons for this reluctance to merge schemes. A fund house may find it difficult to retain existing assets if schemes are merged. Secondly, fund houses have an incentive to charge higher expense ratio for small sized funds (scheme merger increases AUM). Finally, if AMCs have too many schemes, the probability of a few schemes doing well is high, which helps AMCs promote only the better performing schemes. Currently, the industry has close to 1,900 schemes. In fact, a few fund houses have three schemes each in the liquid fund and mid & small cap category. This creates confusion among distributors and investors.

Following the JP Morgan Mutual Fund’s decision to restrict redemption in two of its short term debt schemes due to Amtek Auto episode, SEBI is planning to come out with uniform guidelines on gating practices soon. The decision was taken at a recently held meeting of SEBI’s Mutual Fund Advisory Committee. Gating practices refer to the rights of fund houses to restrict investors from redeeming their investment from the fund if something went wrong with the scheme. Typically, fund houses put such exigency clauses in their offer documents and hence there are no uniform guidelines on gating practices currently. Gating practices defy the purpose of liquidity for which mutual funds are known for. Though such practices can limit investors from exiting the fund, it helps maintaining stability and restricts unnecessary redemption pressure. Earlier in August 2015, JP Morgan Mutual Fund had restricted redemptions in its two schemes – JP Morgan India Short Term Income Fund and JP Morgan India Treasury Fund having collective AUM of Rs. 2,964 crore.

SEBI has asked AMFI to issue guidelines for assessing credit risk of debt instruments. AMFI is likely to issue best practices guidelines on credit assessment practices soon. The decision was taken at a recently held meeting of SEBI Mutual Fund Advisory Committee.

Registrar and transfer (R&T) agents are reaching out to investors to comply with Foreign Account Tax Compliance Act (FATCA) guidelines. AMFI has recently issued uniform guidelines for fund houses to follow FATCA guidelines, which came into effect from November 1, 2015. AMCs are now updating the additional information of existing investors with the help of distributors and R&Ts. In the past three days, over 1 lakh investors have updated their records with CAMS. CAMS and Karvy have facilitated investors to update their details online. In addition, large distributors have been provided standardized format to electronically submit the declaration forms. The new declaration form requires information like type of address (residence, business, registered office, etc.), country of tax residence, tax identification number, Global Intermediary Identification Number (GIIN), and seeks investors consent for sharing the information with relevant tax authorities. FATCA is an anti-tax evasion law under which fund houses are required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. India has agreed ‘in substance’ to FATCA by signing an Intergovernmental Agreement Model 1 (IGA-1) with US with effect from July 9, 2015. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes. Many AMCs had stopped accepting fresh investments from US investors due to stringent compliance requirement.

The Budget 2015 provision to levy Swachh Bharat Cess on all services comes into effect from November 15, 2015 according to a Central Board of Excise and Customs (CBEC) notification. This will increase the service tax burden of distributors by 50 basis points, which means the gross service tax payout goes up to 14.50%. According to industry estimates, the mutual fund industry paid Rs. 6,000 crore commission to distributors last fiscal. A 0.50% Swachh Bharat Cess translates into a payout of Rs. 30 crore. In 2012, the government had put the services of mutual fund agents under the negative list which exempted them from paying service tax. Till 2012, AMCs were deducting service tax and paying it to the government. In Budget 2015, this exemption was withdrawn.

Market regulator SEBI is likely to come out with guidelines on smart beta ETFs. Unlike regular ETFs which merely mimic a particular index, smart beta ETFs try to generate returns slightly higher than ETFs within the framework of passive management. This is a relatively new category in the Indian ETF landscape. Such products are one of the fastest growing categories in the international markets. A BlackRock report shows that as of December 2014, there are more than 700 smart beta ETFs listed around the globe, with $529 billion in assets. Indian fund houses are also trying to bring smart beta index funds/ETFs in India and SEBI is of the view that there is a need for bringing new rules for this emerging category to ensure such innovations do not pose a risk to investors. Since such funds are somewhat active in nature, the expense ratio could be higher than ETFs but lower than actively managed funds. In turn, the turnover ratio or the churning ratio of such funds would naturally be higher. One of the drawbacks of traditional ETFs is that they have exposure to underlying stocks which are weighted solely on market capitalization. Thus, the traditional ETF can be overweight on expensive stocks and underweight on cheap stocks. Smart beta ETFs try to fix this problem by using some attributes of active management.

Losses to unit holders and redemption pressure faced by JPMorgan Asset Management Company (AMC) in September 2015 have driven capital markets regulator SEBI to consider new investment limits for fund houses. According to a proposal under discussion, no fund manager would be allowed to invest more than 20% of a scheme in securities issued by companies belonging to a corporate group. While there are restrictions on the maximum amount that can be invested in a single company or sector, there is no cap on exposure to a single business group. The sector exposure limit is likely to be reduced to 25% from 30% while the single issuer limit may be brought down to 10% from 15%. The additional investment limit of 10% provided for securities issued by housing finance companies is also being reconsidered.

Equities and commodities market regulator SEBI has reiterated that research analysts — be it fundamental or technical — cannot deal/trade in securities that they recommend/follow in their research reports, 30 days before and five days after publishing a report. SEBI clarified in an informal guidance to Geojit BNP Paribas Financial Services that research entities shall not issue a research report that is not consistent with the views of individuals employed as analysts in a company.  SEBI added that in case contrarian views were held by research analysts employed in different teams of the research entity, the entity has to publish the report identifying the views of the different teams without altering them. The genesis of the issue lies in the fact that fundamental analysis is used to decide whether to buy a particular stock and technical analysis to decide when to buy and when to sell. Given the different nature of both the analyses, situations occur when a fundamental analyst gives a buy call on a stock while a technical analyst gives a sell call on the same stock. It also happens that while the retail research team of a brokerage house has a buy call on a scrip, the institutional research team may recommend otherwise.

A longstanding demand of distributors to get feeds of direct plan has finally been met. AMFI has sent a letter to fund houses communicating SEBI’s approval on providing feeds of direct plans to both distributors and RIAs. However, SEBI has asked fund houses to take prior approval of investors before sharing it with the intermediaries. Investors will have to give their consent in a standard format which is being worked out by AMFI. Also, SEBI has asked fund houses to issue a periodic declaration authorized by the trustees of AMCs that no consideration or brokerages are being paid to distributors or RIAs for such a service. Earlier, AMFI had requested SEBI to allow fund houses to provide direct plan feeds to the distributors and RIAs. It may be recalled that with the introduction of the direct plan, the distributor has been cut out. It was argued that tagging would enable the advisor to get access to client records for the investments recommended by him/her so that they could monitor their client portfolios. In other words, distributors wanted their ARNs to be tagged in direct applications so that they could get the feeds of schemes they recommend to their clients.

SEBI is likely to come out with a new regulation in which it will tighten disclosure norms for fund houses and intermediaries to make it more transparent. SEBI rules mandate fund houses to disclose commission payouts of top distributors on yearly basis on their respective websites. Currently, AMCs have to do due diligence of distributors who have multiple point presence (more than 20 locations), AUM over Rs.100 crore across industry in the retail category, commission received of over Rs. 1 crore per annum across industry and commission received of over Rs.50 lakh from a single mutual fund. In case a distributor has an excessive portfolio turnover, i.e. more than two times the industry average, AMCs have to do additional due diligence of such distributors.

Markets regulator, Securities and Exchange Board of India, will soon come out with measures to further strengthen investors’ confidence in the mutual fund sector. The mutual fund industry must come out with simple products that can be sold to people across India and they should be able to know the consequences i.e. the risks and rewards for investing in mutual funds. To increase investor participation in mutual fund sector SEBI had allowed cash transactions. This route has not been utilised to its full extent. Besides, online tractions mainly constitute about 16% and this route too has not been fully utilised.

FUND FULCRUM

November 2015

Driven by strong inflows in equity and liquid schemes, the asset base of the country's mutual fund industry surged 11.5% to an all-time high of over Rs 13.24 lakh crore in October 2015. The country's 44 fund houses together had an average asset under management (AUM) of over Rs 11.87 lakh crore in September 2015, according to the latest data of the Association of Mutual Funds in India (AMFI). The quarterly rise in AUM is largely on account of inflows in equity and money market liquid categories. Besides, retail participation in equity schemes has risen significantly in recent months. Investors remained buoyant on equity mutual funds despite the ongoing volatility. Overall inflow in mutual fund schemes stood at Rs 1.35 lakh crore at the end of August 2015, compared with an outflow of Rs 77,142 crore at the end of September 2015. Of this, liquid or money market category saw Rs 1.03 lakh crore coming in while equity segment saw an inflow of Rs 6,005 crore. Participation from retail investors has been rising in equity schemes as the segment witnessed an addition of over 21 lakh investor accounts or folios in the first six months of 2015-16. Besides, addition in equity folios helped increase overall base to go up to 4.44 crore in September 2015, from 4.17 crore at the end of March 2015.

Mutual fund industry’s folio base continues to show an upward trend. The latest SEBI data shows that the industry has added a total of over 28 lakh folios in seven months, i.e. April-October 2015. Among categories, equity funds saw the highest growth in folio count. The category saw addition of more than 21 lakh folios. Of this, equity funds added 19.22 lakh folios while ELSS added 2.17 lakh folios. The increase in folio count in equity is evident by the inflows in equity funds. From April till October 2015, equity funds (including ELSS) have received net inflows of Rs. 59,935 crore.  Some part of the money has also gone in new fund offers as the total number of equity funds went up to 407 in October 2015 from 383 in April 2015. The total folio count in equity funds went up from 3.19 crore in April 2015 to 3.41 crore in October 2015. Balanced funds too saw an addition of 2.26 lakh folios during April-October 2015. The total folio count in debt funds went up to 76.44 lakh in October 2015 from 71.86 lakh in April 2015, an increase of 4.58 lakh folios. Gilt and liquid funds added 3,518 and 25,396 folios respectively. In the debt category, income funds added the maximum folios (4.29 lakh). Gold ETFs continued to lose folios due to the lackluster performance of the yellow metal. The category has seen erosion of 22,751 folios in the last seven months. On the other hand, ETFs which track equity indices, continued to gain traction. Equity ETFs added 15,621 folios during the same period. Overall, the total folio count (across all categories) went up from 4.20 crore in April 2015 to 4.48 crore in October 2015.   

Piquant Parade

SEBI is likely to come out with the guidelines on distribution of mutual funds through e-commerce websites like FlipKart, Amazon, and Snapdeal. In addition to regular and direct plans, SEBI is looking to introduce a third plan in mutual funds called e-commerce plan. The TER of such schemes would be somewhere between direct plan and regular plan. The commission on mutual fund schemes sold through such websites will be capped at 50 bps. Two months back, SEBI has constituted a committee headed by Nandan Nilekani to suggest measures to reduce cost structure in mutual funds. The committee has already met three times and is likely to give its recommendations shortly.

Robo advisory is the new buzzword in the financial advisory profession. One more e-commerce startup Innovage Fintech has launched a robo advisory platform called ‘5nance.com’. 5nance.com will provide financial advisory service without charging any fees. The portal will distribute investment products like mutual funds, insurance, FDs, gold, bonds, equities, loans, credit cards, etc. The company is planning to acquire new clients through digital marketing initiatives and investor awareness programs. The company aims to build a client base of 3 lakh by 2016 and cross 70 lakh in the next 5 years. Innovage Fintech has raised over $3 million through angel investors and is planning to raise another $15 million in the coming months. Robo advisors use algorithms and model portfolio to construct client portfolio. Investors have to fill up their details and goals based on which these advisors recommend a plan or a list of schemes to invest in. In India, Fundsindia, Fundsupermart, MyUniverse, Scripbox, and Arthyantra claim to follow Robo advisory model.

As more retail investors enter equities through the mutual funds route, new players are lining up to win a share of the rapidly growing domestic asset management business. At least three new fund houses, including Ireland-based Zyfin Funds, Mahindra and Mahindra Financial Services, and Yes Bank are set to throw their hats into the ring, for a share of the industry that currently manages assets worth Rs. 13 lakh crore. Zyfin Funds is likely to announce its launch within the next few weeks. Zyfin (formerly Blufin) is a macro-analytics firm that publishes research and indices on macroeconomics, consumer sentiment, and the capital market. The company is backed by investment firms Zodius and Anthemis Group. Zyfin Funds, according to its website, is set to offer ETF products based on emerging market indices for global investors through an offshore fund platform. Zyfin Holdings will also offer advisory services (with regard to product modelling, theme selection, index generation) to global financial institutions, which will then co-brand their products with Zyfin. M&M Financial Services (Mahindra Finance) has also speeded up the process of launching its own fund house. The company received approval from SEBI in October 2011, but is yet to launch the fund house as it was unsure about entering the market. According to SEBI officials, the company’s application for final approval is under process. Mahindra Finance already has an extensive distribution network in place as it sells mutual funds for other fund houses. It is bound to capitalise on this network to help grow its business. Earlier this month, YES Bank received RBI approval to set up a mutual fund and will apply for approvals from capital market regulator, SEBI. The bank expects to launch its AMC within a year, and may even take over an existing mid-sized fund house (Rs.30,000-40,000 crore of assets). According to the SEBI website, Karvy Stock Broking, Trust Investment Advisors, and Fortune Financial Services/ Fortune Credit Capital are awaiting in-principle approval from the regulator on their mutual fund applications.

Religare Enterprises has entered into binding agreement to sell 51% stake in Religare Invesco Asset Management Co., which manages assets worth 21,594 crore, to foreign partner Invesco for 6% of assets under management (AUM) or 660-700 crore. The company is planning to mobilise resources through asset sales. The money from the divestment will be used to reduce debt at the holding level besides infusing funds in the health insurance and lending businesses. Religare Enterprises has debt of about Rs. 600 crore. 

The Securities and Exchange Board of India is planning to mandate fund houses to disclose the compensation paid to the senior management and also their individual investments in the schemes to investors. The regulator feels some of the fund officials are overpaid compared to the corpus they manage after examining the information provided by asset management companies on the compensation structure. Since executive compensation is paid from the management fees charged to the scheme, SEBI feels it is important that adequate disclosures regarding the same are made to investors. The move is aimed at promoting transparency in remuneration policies so that executive compensation is aligned with the interest of investors. At present, fund houses decide on the compensation structure for its employees and there are also no disclosure requirements on the payout to employees. In developed markets such as US, Europe, and Canada there are no regulatory restrictions on executive remuneration. However, post the global financial crisis, regulators across the globe are focusing on improving disclosure standards with respect to executive remuneration. In India, the Reserve Bank has mandated a compensation policy for the whole-time directors and CEO of domestic private sector and foreign banks and has also restricted payment of guaranteed bonuses to them. Listed companies too are required to disclose remuneration paid to key managerial personnel. SEBI feels managers' investment within the fund should also be provided to investors. 

In order to spread awareness about mutual funds, AMFI has put up a mutual fund stall in which it has invited AMCs to participate in the 35th India International Trade Fair held in Delhi. This 14-day-long fair has started on November 14. SEBI has organized a financial literacy campaign called ‘Bharat Kaa Share Bazar’ at this trade fair in which it has asked associations and stock exchanges like AMFI, NSE, BSE, NSDL, CDSL, NCDEX, MCX, and NISM to put up their stalls to create awareness. 12 fund houses are participating in this exercise to create awareness on mutual funds. Such events attract a lot of visitors and by setting up stalls investors will get to know more about mutual fund products. The idea is to make people aware about mutual funds and how versatile they are in meeting investor needs no matter what their goals, time horizons, or risk appetite are. The participating AMCs include UTI, Axis, BNP Paribas, Birla Sun Life, Reliance, IDBI, Peerless, Franklin Templeton, and L&T Mutual Fund. These fund houses are attracting visitors through a variety of activities like quizzes, skits, and game shows.

…to be continued…

NFO NEST

November 2015

NFOs of various hues

NFOs of various hues adorn the November 2015 NFONEST.

Peerless Long Term Advantage Fund

Opens: November 9, 2015

Closes: November 21, 2015

Peerless Mutual Fund has launched a new fund named as Peerless Long Term Advantage Fund, an open ended equity linked savings scheme with a 3 year lock-in. The fund will seek to invest predominantly in a diversified portfolio of equity and equity related instruments with the objective of providing investors with opportunities for capital appreciation and income generation along with the benefit of income tax deduction (under Section 80 C of the Income Tax Act, 1961) on their investments. The fund will invest 80%-100% in equity and equity related instruments with high risk profile and invest up to 20% of assets in debt and money market instruments with low to medium risk profile. Benchmark Index for the fund is S&P BSE 100 Index. The fund will be managed by Amit Nigam and Killol P.Pandya.

LIC Nomura MF Exchange Traded Fund - Sensex

Opens: November 9, 2015

Closes: November 23, 2015

LIC Nomura Mutual Fund has launched an open ended Exchange Traded Fund- LIC Nomura MF Exchange Traded Fund - Sensex. It is Rajiv Gandhi Equity Savings Scheme (RGESS) Qualified Scheme. The investment objective of the fund is to provide returns that closely correspond to the total returns of the securities as represented by the S&P BSE Sensex by holding S&P BSE Sensex stocks in same proportion, subject to tracking errors. The fund will invest 95%-100% of assets in securities covered by the Sensex  with medium to high risk profile and invest up to 5% of assets in cash and cash equivalent/money market instruments including CBLO (with maturity not exceeding 91 days) with low risk profile. The fund’s performance will be benchmarked against S&P BSE SENSEX and its fund manager is Sachin Relekar.

Reliance Capital Builder Fund II – Series B

Opens: November 10, 2015

Closes: November 24, 2015

Reliance Mutual Fund has launched a new fund named as Reliance Capital Builder Fund III - Series B, a close ended equity oriented fund with the duration of 582 days from the date of allotment. The investment objective of the fund is to provide capital appreciation to the investors, which will be in line with their long term savings goal, by investing in a diversified portfolio of equity and equity related instruments with small exposure to fixed income securities. The fund will allocate 80%-100% of assets in diversified equity and equity related instruments with high risk profile and invest up to 20% of assets in debt and money market instruments with low to medium risk profile. Benchmark Index for the fund is S&P BSE 200 Index. The fund managers are Omprakash Kuckian and Jahnvee Shah (Fund manager-overseas investments).

India Bulls Monthly Income Plan

Opens: November 10, 2015

Closes: November 25, 2015

Indiabulls Mutual Fund has launched the Indiabulls Monthly Income Plan, an open ended income fund. The investment objective of the fund is to generate regular monthly returns through investment primarily in debt securities. The secondary objective of the fund is to generate long-term capital appreciation by investing a portion of the fund's assets in equity securities. Monthly income is not assured and is subject to availability of distributable surplus. The fund’s performance will be benchmarked against CRISIL MIP Blended Index and its fund managers are Malay Shah and Sumit Bhatnagar.

Kotak NV 20 ETF

Opens: November 12, 2015

Closes: November 26, 2015

Kotak Mutual Fund launches a new fund as Kotak NV 20 ETF, an open ended exchange traded fund, with the objective of providing returns before expenses that closely correspond to the total returns of stocks as represented by the NV 20 Index, subject to tracking errors. The fund will invest 95%-100% of assets in stocks comprising NV 20 Index with medium to high risk profile and invest up to 5% of cash and debt/money market instruments with low risk profile. The fund's performance will be benchmarked against NV 20 Index. The fund will be managed by Deepak Gupta.

Axis Childrens Gift Fund

Opens: November 18, 2015

Closes: December 2, 2015

Axis Mutual Fund has launched the Axis Children’s Gift Fund, an open ended income fund. The fund aims at generating income by investing in debt and money market instruments along with long-term capital appreciation through investments in equity and equity related instruments. The fund managers are Pankaj Murarka and Kedar Karnik.

DHFL Pramerica Tax Savings Fund

Opens: October 19, 2015

Closes: December 4, 2015

DHFL Pramerica Tax Savings Fund is an open ended equity linked savings scheme with a lock-in period of 3 years. The primary objective of the fund is to generate long-term capital appreciation by predominantly investing in equity and equity related instruments and to enable eligible investors to avail deduction from total income, as permitted under the Income Tax Act, 1961 as amended from time to time. The fund will invest 80-100% of assets in equity and equity related instruments with high risk profile and up to 20% in cash, money market instruments and liquid schemes of DHFL Pramerica Mutual Fund with low to medium risk profile. The benchmark Index for the fund is BSE 200 Index. The fund will be managed by Brahmaprakash Singh (equity component) and Ritesh Jain (debt component). 

Tata Mutual Fund is launching five new funds and one existing fund under the theme of Own a Piece of India - Tata Banking and Financial Services Fund, Tata India Consumer Fund, Tata Digital India Fund, Tata India Pharma & Healthcare Fund, and Tata Resources & Energy Fund. UTI Long Term Advantage Fund Series III, Edelweiss Exchange Traded Scheme Quality 30, Axis Nifty ETF, DSP Blackrock Absolute Return Fund, Birla Sunlife Dual Advantage Fund Series I-V, Kotak capital Protection Oriented Scheme - Series 3 and 4, and IDFC Balanced Fund are expected to be launched in the coming months.

GEMGAZE

November 2015 

Tax woes often make life seem like a burden. Do we not all just wish our hard-earned money would be ours, to invest for the future, without worrying about tax? This is why an Equity Linked Savings Scheme helps investors who wish to address two critical issues: tax planning and wealth creation. Invest in the ELSS GEMs and benefit from the long-term growth potential.

The consistent performance of all five funds in the November 2014 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the November 2015 GEMGAZE.

Magnum Taxgain Fund Gem

Strategic shift

One of the largest funds in the tax-saving category with an AUM of Rs. 4,743 crore, SBI Magnum Taxgain has been a middle-of-the-road fund in the long term but has delivered good one- and three-year performance. Over its eighteen-year record, it has held onto a three-star rating for much of the period. The fund has undergone a substantial shift in strategy in the last six-seven years. From a fund which bet big on mid- and small-cap stocks, SBI Magnum Taxgain has transformed into a large-cap-oriented ELSS fund. The fund focuses on the top 100 companies by market cap. Asset-rich companies available at attractive valuations and stable businesses with very good visibility on sustaining business momentum are the fund's key choices. In the last five years, 65-70% of the portfolio has been consistently allocated to large caps, more than the ELSS category in general. At present, the allocation to large cap stocks is at 69%. After a patchy start, this fund has delivered good returns over the last seven years mainly on the back of a switch in the strategy to a large-cap bias. The fund has also beaten the benchmark and the category in six of the last eight years. There are 44 stocks in the portfolio, with the top 5 holdings accounting for 24.91% of the portfolio. The top three sectors that the fund invests in are finance, technology, and energy. One-year return of the fund is 5.21%, on par with the category average of 5.21%. The expense ratio is 2.21% and the portfolio turnover ratio is 9%.

HDFC Tax Saver Fund Gem

A temporary lull?

At Rs. 4746 crore, HDFC Tax Saver Fund is the largest ELSS fund in the industry. Currently, large caps account for 69% of the portfolio. With 53 stocks and the top 5 holdings accounting for 30.72%, the fund looks well diversified. The top three sectors that the fund invests in are finance, technology, and energy. In the past one year, the fund has earned a return of -4.64% as against the category average of 5.21%. The expense ratio is 2.3% and turnover ratio is 25%. 

Canara Robeco Equity Tax Saver Fund Gem

Applying brakes?

The Rs. 840 crore Canara Robeco Equity Tax Saver Fund has been pretty successful in utilising the agility that a small fund offers by spotting opportunities and capitalising on them. Allocation to the top 5 holdings (26.31%) is in line with the category average. Over the past five years, financial services, energy, and technology have been part of the top five sectors and the top three sectors are finance, technology, and energy, in that order. There are 54 stocks in the portfolio with 61% allocated to largecap stocks. Canara Robeco’s ELSS fund ranks in the top quartile of funds in its category in the five-year timeframe. On an annual rolling return basis over the past five years, the fund has beaten its benchmark, BSE 100, 78% of the time. Across timeframes, the fund has beaten the BSE 100 by a margin of 4 to 12 percentage points. The fund’s strategy of investing mostly in large-cap stocks and that of switching to cash and debt when markets appear shaky has limited its returns. One-year return is 1.37 % as against the category average of 5.21 %. The expense ratio is 2.63% and portfolio turnover ratio is 39%. 

Religare Invesco Tax Plan Gem

Consistency – the mainstay

With a corpus size of Rs. 255 crore, Religare Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. The fund invests across market capitalisation and sectors and spreads its assets over 43 stocks without being overly diversified and the top 5 holdings constitute 30.74%. The top three sectors are finance, technology, and auto. Even though the fund currently has a large cap bias with 67% allocation, it has not been hesitant about being heavily invested in smaller companies. In the past too, the mid-cap and small-cap allocation have been high. Its relatively small size makes an effective mid-cap strategy viable. The one-year return is 9.08% as against the category average of 5.21%. Despite its relatively short history, the fund has consistently delivered returns for the investors. Over one, three, and five year time-frames, the fund has beaten the BSE 100 by a margin of two to five percentage points. In the rollercoaster ride the market has taken in the past five years, the fund performed well across market cycles. Stock picking has been the key for success of this fund. The expense ratio is 2.87% and the portfolio turnover ratio is 18%.

DSPBR Tax Saver Fund Gem

Sound investment strategy

DSPBR Tax Saver Fund has a fund corpus of around Rs 1095 crore. It has a growth-oriented multi cap portfolio with 72% of the corpus in large cap stocks. There are 52 stocks in the portfolio. The top 5 holdings constitute 30.18%. The top three sectors are finance, technology, and energy. The fund follows an investment strategy that remains rooted to a bottom-up approach with a predominant focus on growth-oriented stocks. The manager uses sector-based model portfolios created by analysts as his initial reference point. He combines this with absolute and relative valuation measures to pick stocks. He scouts for stocks that have high/rising return on equity along with good scalability prospects. The manager shows a value bias by investing a small portion in companies that trade at close to half their book value. Top-down research is taken into consideration when taking sector bets, with the manager typically looking for sectors that demonstrate strong pricing power. The manager pays heed to portfolio construction, with strong emphasis on liquidity and risk mitigation. DSP BR Tax Saver fund has offered 6.09% returns for the last one year as against the category average of 5.21%. The expense ratio is 2.64% and the portfolio turnover ratio is 46%.

FUND FLAVOUR

November 2015

Tax planning may seem like a tedious exercise requiring tremendous effort that may make an ordinary investor nervous at the first glance. Equity Linked Savings Scheme (ELSS) offers a simple way to get tax benefits and at the same time get an opportunity to gain from the potential of Indian equity markets. Simply put, ELSS is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act since an investment of up to Rs. 1.5 lakh in ELSS funds qualifies as deduction from your taxable income, and offers the twin-advantage of capital appreciation and tax benefits. It comes with a lock-in period of three years. If you choose the dividend option for investing in either ELSS or diversified equity funds, dividends in either case are tax free in the hands of the investors. Long term capital gains from both ELSS and diversified equity funds are also tax free.

Why invest in ELSS funds

When investors put their money in a tax-saving product, they are usually concerned only with the amount of tax they will save. Ideally, they should also pay attention to the returns that these tax-saving investments will yield.

ELSS funds score highly on this count. ELSS is one of the instruments under Section 80C that takes 100% exposure to equities. Hence, along with tax saving, it also offers the benefit of wealth creation. The ELSS category has given an average return of 43.48% over the past one year and 22.99% over three years. Fixed-income schemes like PPF, EPF, and NSC pay an interest rate of 8-9% while Sukanya Samriddhi Scheme pays slightly more at 9.2%. The returns from NPS tend to be lower than that from ELSS funds as the former allows a maximum of only 50% investment in equities, and that too only in Nifty stocks. Traditional insurance plans give a return of barely 5-6%. While Ulips do invest in equities, a part of the premium goes into offering insurance cover. The higher returns in ELSS funds will, of course, come with higher volatility.

Conservative investors should, however, remember that the risk in equities declines as your investment horizon increases. If you are anyway going to have your money locked up for three years, you may as well invest at least a part of your tax-saving portfolio in an equity-based instrument like ELSS. The returns will be higher, and the interim volatility will not matter due to the lock-in. Investors keen on wealth creation should leave their money invested in an ELSS fund even after the mandatory three-year lock-in so as to earn optimal returns from it.

The risk of making a loss in equities becomes very small if you stay invested for 5-7 years. The three-year lock-in also allows fund managers do a better job. To deliver steady returns, a fund manager needs a steady and predictable inflow of AUM. The three-year lock-in period in ELSS funds gives fund managers the leeway to thoroughly analyse companies and invest with a longer time horizon. They can do so because they know that the money is going to stay with them for at least three years.

A boon to the investor

 

There are a number of benefits of investing in ELSS funds.

• Starts at just Rs. 500 – You can start investing in ELSS funds at a low starting amount of just Rs.500.
• Tax saving – ELSS funds qualify for tax saving. Investments in ELSS funds up to INR 1.5 lakhs will help reduce your tax burden (for people in the 30% tax bracket, you can save up to INR 45,000)
• Capital growth – Your money keeps growing. With power of compounding, you will accumulate a good amount by the time you withdraw
• Disciplined investing- With the power of monthly investment, you can get disciplined with your investing and tax planning
• Tax free returns- The returns you gain from ELSS funds are completely tax-free
• Shortest lock-in period- Out of all the 80C investment options that let you grow your wealth, ELSS funds have the shortest lock-in period of 3 years
• Inflation beating returns- Since ELSS funds are equity mutual funds, they give superior returns (14-16%) compared to other tax-saving options in the long term (5-7 years)

Choose the right fund

 

ELSS schemes typically invest in equity markets. So, comprehensive research goes a long way of moulding it into a sensible investment rather than a mere speculation. Any investor must analyze the following factors before investing in ELSS.

• Compare its risk-adjusted returns over the short (six-month and one-year), medium (three-year), and long-term (five-year) horizons vis-a-vis its benchmark and the category average. Ensure that the fund is consistent and has been ahead over all or most of these time horizons. Last five-year performance will help you understand the relative stability and pattern of the returns.
• The fund's expense ratio, level of churn, and level of risk should be lower than the category average. There should also be consistency at the helm.
• Track record of the fund manager.
• Investing fund house, its business performance, safety and experience in this domain.
• The quality of the investment stocks and their historical performance.
• Fund rating by rating agencies like CRISIL.
• It is better to choose the growth option under ELSS. Do not commit the mistake of opting for the dividend reinvestment plan, under which the dividend payout is again invested to buy more units of the same scheme. Every time this event happens, the new units get locked in for another three years.
• If you are cautious investor, it is better to opt for a diversified fund.

  What should you avoid?

 Avoid making a lump sum investment in ELSS funds. If the market is at a high level and it falls right after you invest— the sort of conditions that prevail today—you will see massive erosion in your portfolio value. Instead, use the SIP approach and take advantage of rupee-cost averaging to garner good returns from these funds.

When selecting an ELSS fund, take into consideration your own risk appetite. Conservative investors should avoid ELSS funds that take large exposure to mid- and small-cap stocks. They should stick to funds that invest primarily in large-cap stocks. Aggressive investors may opt for funds with a higher mid- and small-cap exposure.

Finally, since in all likelihood your purpose is to build up a corpus to meet various financial goals, avoid the dividend option and go for the growth option.

ELSS good for long-term investment

ELSS form a part of the tax saving investment basket as they not only reduce the tax outgo but are also an efficient long-term investment tool. Three-year lock-in period gives these mutual fund schemes a performance benefit above tax saving.

There are other products you can opt for that are eligible under section 80C of the Income-tax Act for a deduction of up to a maximum of Rs.1.5 lakh. These would include contributions to Public Provident Fund, Employees’ Provident Fund, life insurance premiums, National Savings Certificates, Senior Citizens Savings Schemes, five-year term deposits, and post office schemes. 

Although being equity linked means that ELSS investments come with some market risk, if you are making a tax saving investment with the intention to remain invested for 3-5 years or longer, ELSS is the most efficient choice.

The equity advantage

 

Mostly, funds in the ELSS category are considered only for tax saving. However, these are managed as diversified equity funds with a long-term investment outlook. ELSS is an equity fund and comes with a three-year lock in. The lock-in means that while you can continue to invest money as and when you desire, you will necessarily have to remain invested for three years. The obvious disadvantage is that you will not have liquidity to move your money as you need. Nevertheless, the advantages outweigh. For one, your money remains invested for at least three years, which is a reasonably long period for equity portfolios to accumulate profits and cultivate investor discipline.

At the end of three years, whether you want to withdraw your money or let it remain invested is your choice.

In the long run, equity investments can help you earn returns that beat inflation. Fixed deposits, bonds, and other interest bearing investments at best offer returns that may match the pace of inflation over a period of time, but the real return is low. If you consider the market barometer, S&P BSE Sensex, a large-cap index of 30 stocks, data shows that the 10-year rolling return over the past 20 years was an average of 15%.

ELSS has a brilliant structure, which lets investors remain in the fund for three years. This also allows for longer term calls in the portfolio. Then why not encourage investments through the year rather than focusing simply on tax savings?  In keeping with this focus, some fund houses have renamed their tax saving equity schemes, say for instance, Axis Long Term Equity fund.

Performance Matters

Once you have invested in an ELSS, there is no need to withdraw even after the lock-in period is over if the fund is performing well. Some investors are mis-informed that they have to withdraw money in three years. For investors who are not disciplined and might panic about short-term movements, ELSS works well.

Over the years, the popularity of such mutual fund schemes has increased. Ten years ago, there were 34 such funds with collective assets under management (AUM) of Rs.1,740 crore. By the end of 2009, the number had increased to 45 and the total assets under this category went up to Rs.23,000 crore. Now the number of schemes has gone up to 49, and total assets for the category to Rs.35,000 crore. But this is just about 10% of the overall equity AUM across mutual funds.

On an average, funds within this category have performed marginally better than a basket of open-ended multi-cap and large- and mid-cap schemes. The average compounded annual growth rate (CAGR) for the category in a five-year period is around 13.6%, and 28% for a three-year period. This is comparable with the average returns of around 12.2% and 25.3% for five and three years respectively in case of a basket of diversified open-ended equity funds. In the past one year, average returns from the ELSS category were close to 54% against 29% gains in the Sensex.

Alternative to closed-end funds 

Lately, we have seen a number of new funds being launched in the closed-end structure. An advantage that these are touted to bring to the table is forcing investors to be disciplined and remain invested. The ELSS category does the same thing, thanks to the lock-in, and has the added benefit of giving investors the choice of redemption at the end of the tenor. They also come with a performance track record stretching to 5-10 years, which is missing in case of new closed end funds.

Unlike in the case of closed-end funds, you can make regular investments or invest in systematic investment plans (SIPs) of these funds. But before doing so, do keep in mind that the lock-in period will apply to each SIP successively. This means that an investment made in, say, January 2015 will be available to you after January 2018, and one made in October 2015 will be available only after October 2018. This may be inconvenient if you want to withdraw in a lump sum at the end of the initial three-year period.

The category is worth looking at not just for your tax saving needs but also for your overall long-term investment requirements, especially if you lack the discipline to remain invested through short periods of market volatility. But the task to manage long-term investments would be yours.

Many fund houses have only one ELSS and hence, the focus is not divided across many funds within the same category. After your three-year lock-in is over, evaluate the performance of the scheme and then decide whether you want to remain invested for longer. Unless you need funds, it is always better to let equity investments remain for as long as possible. However, do keep in mind that this is an equity-linked investment and comes with a risk or uncertainty of returns. Returns are not assured as is the case with some other investments linked to the section 80C deduction.

ELSS – Ideal for Tax Savings and Wealth Creation

The ELSS funds have been successful in creating wealth for investors over longer period of time. The performances of the ELSS funds are determined by the stock market performance in general. If an investor, whose risk taking appetite is low, gets better tax-adjusted returns from other investment avenues like debt, he will prefer to go for that, as risk is lower. But over a longer period of time, ELSS funds are the best tax saving investment especially if you are willing to take a little amount of risk.

ELSS is suitable for investors with moderate to high-risk appetite with a long-term investment horizon. Keep in mind that returns in these schemes fluctuate depending upon the equity markets. In a nutshell the scheme does not guarantee any fixed amount of returns. So if you are one of those who would accept lower but guaranteed returns, then ELSS may not be the right product for you. So if you want to save taxes, invest for the long term, and get higher returns, then make sure you choose good ELSS funds having proven track records, for your portfolio. Though there is no age to get started on an ELSS, it is a good investment to have for those who are just starting their careers as it can help them shed their inhibition about investing in equities through mutual funds in a big way.