FUND FULCRUM

November 2016

Mutual fund managers have pumped in over Rs 1.78 lakh crore in the debt market during the April-October period of the current financial year, primarily on account of strong participation from retail investors. Besides, they invested a net amount of Rs 21,000 crore in equity markets during the period under review. The inflows can be attributed to increased participation from retail investors and positive sentiment that was boosted after the long-stalled GST Constitution Amendment Bill was passed in Parliament in August 2016. Monthly net contributions through SIP (Systematic Investment Plan) led to higher positive net inflows in equity markets. As per the data released by the capital markets regulator Securities and Exchange Board of India (SEBI), mutual fund managers invested a net sum of Rs 1.78 lakh crore in April-October period of 2016-17. They had pumped in Rs 2.03 lakh crore between April and October in 2015-16. For the entire 2015-16 fiscal, fund managers had put in a net amount of Rs 2.73 lakh crore in the debt market. This inflow has helped the mutual fund industry to reach the over Rs 16 lakh crore mark in assets under management (AUM) at the end of September 2016, as per the latest data. In comparison, Foreign Portfolio Investors made a net investment of just Rs 3,000 crore into debt markets during the first seven months of the current fiscal (2016-17). Balanced funds saw net inflow of Rs 3,385 crore. However, liquid or money market segment saw an outflow of over Rs 34,800 crore. Overall, the asset under management of the country's 42 active fund houses increased to a historic high of Rs 16.3 lakh crore at the end of October 2016 from Rs 15.8 lakh crore at the end of September 2016.

Driven by addition in equity fund folios, mutual fund houses have registered a surge of more than 36 lakh investor accounts in the first seven months of the current fiscal, taking the total tally to 5.13 crore. This is on top of an additional 59 lakh folios in 2015-16 and 22 lakh in 2014-15. In the last two years, investor accounts increased mainly due to robust contribution from smaller towns. According to the data from the Association of Mutual Funds in India (AMFI) on total investor accounts with 43 fund houses, the number of folios rose to a record 5,1,287,934 at the end of October 2016 from 4,76,63,024 in March 2016, a gain of 36.25 lakh. Growing participation from retail investors, especially from smaller towns, and huge inflows in equity schemes have helped in increasing the overall folio counts. The equity category witnessed an addition of close to 15 lakh investor folios to 3.8 crore in April-October period of the current fiscal. Mutual funds have reported a net inflow of over Rs 31,000 crore in equity schemes in the first half of the current fiscal. Overall, funds have seen an infusion of Rs 2.67 lakh crore. The inflow is in line with the Sensex surging 10% during the period under review.

Piquant Parade

FundsIndia.co, an investment platform, has launched a first-of-its-kind innovative tool - ‘Gamification in Mutual Fund Investing’ for its investors. This feature will encourage good investing behavior and ensure that investors stay on the right path to investing successfully. Gamification is a concept of applying game mechanics and game design techniques to engage and motivate people to achieve their investment goals. FundsIndia.com’s approach towards gamification is to engage with existing investors and provide a seamless blend of fun and real investing. Keeping with its mission of creating and providing the friendliest investment platform to their customers, FundsIndia.com has developed a new feature - ‘Gamification’. It is a feature that ranks investors among their peers, so that they know where they stand among other investors similar to them. It is like an instant financial health check up for them. It is called gamification because it introduces game thinking and game elements into investing. It encourages good investment choices and discourages bad ones. Investors will be able to see this on their dashboard in the form of their ‘Peer Ranking. It is the percentile rank that tells investors where they stand among their peers. Apart from the score, the exciting new feature allows investors to earn badges. Positive investing behavior, which FundsIndia believes will make people better investors, will earn investors badges, recognizing their efforts toward disciplined investing. 

Regulatory Rigmarole

Market regulator SEBI has come out with detailed guidelines relating to rating criteria, process, and disclosures for credit rating agencies (CRAs). The regulator has asked rating agencies to disclose the criteria used for rating instruments, rating process and policies, all rating history, press releases and rating reports assigned by the CRAs including ratings withdrawn on their websites. Rating agencies have to implement these guidelines within 60 days. SEBI’s move comes in the wake of sharp downgrade in ratings of Amtek Auto which forced JP Morgan AMC to restrict redemptions in two of its funds.

SEBI has asked entities regulated by it, including registered investment advisers (RIAs), to upload the KYC data of all individual accounts opened on or after August 1, 2016 by March 31, 2017 on Central KYC Registry (CKYCR) platform. In this regard, SEBI has drawn a timeline for the AMCs to upload these documents. According to the timeline, AMCs have to ensure 30% completion of uploading existing KYC documents by November 30, 2016, another 30% by January 31, 2017 and the rest 40% by March 31, 2017. The government’s ambitious central KYC (CKYC) has gone live from July 15 in a phased manner. This paves way for a single bank KYC which will suffice to invest in all financial products, including mutual funds. This was announced in the Union Budget 2012-13. A month back, all the financial regulators - SEBI, PFRDA, RBI, and IRDAI have issued circulars instructing their respective regulated entities to upload KYC data of their customers on the CKYCR platform. Over a period of time, all investor data will be stored at a single place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC.

In order to check insider trading, SEBI has come out with a circular to provide clarity on how AMC officials can invest their own money. Among the key changes are cooling period of 15 days for employees to invest in stocks and relaxation in disclosure of certain investments.

Here are the key investment guidelines for the AMC officials

·         Employees need not disclose their investments in fixed deposit instruments like bank FDs, PPF, NSC, and Kisan Vikas Patra, investment in non-financial instruments like gold, and investment in government securities, liquid funds.
·         However, no officials can buy/sell stocks without taking prior approval from compliance officer of the AMC.
·         If an employee wants to buy a particular listed security, he/she has to take prior approval of the compliance officer. The compliance officer has to check with the fund management team if they have executed any trade in that stock for the period of 15 calendar days. If no trade has been executed within 15 calendar days, compliance officer will give approval. The employee has to execute trade within 7 days of receiving such approvals. Moreover, the fund manager cannot execute trade in that particular stock within 15 calendar days if an employee has executed trade. This 15 days is termed as cooling period.
·         Employees can invest in IPOs through public placement route without taking prior approval from the AMCs.
·         Employees will have to intimate the compliance officer if they participate in preference or right issue.
·         Front running is strictly prohibited. Front-running is a practice where a person or a group of persons buy or sell shares in their own account taking advantage of advance information about orders from clients. Front-running is detrimental to the interests of investors and is, therefore, an illegal practice.
·         Employees are expected not to book any profit from the purchase or sale of any security within a period of 30 calendar days. However, in cases where it is done, the employee will have to provide suitable explanation to the compliance officer.
·         Employees will have to disclose their mutual fund investments except liquid fund holding to the compliance officer within 7 calendar days from the date of transaction. However, employees need not disclose their investments with the other fund houses.
·         Employees will have to disclose their SIP investments in mutual funds at the time of making first installment.
·         Employees cannot execute transaction in the scheme if investors have not been communicated about changes in fundamental attributes like change in investment objective, fund manager etc.

AMCs will have to maintain a record of all transactions of their employees made during the financial year and ensure compliance within 30 days from the end of the financial year. The Board of the AMC and the trustees will have to review the compliance of these guidelines. This will come into effect from December 1, 2016.

SEBI is likely to ease investment guidelines for fund houses. The market regulator is looking to allow fund houses to take exposure to derivative instruments by just sending a notice intimating unit holders about this. This was discussed at the meeting of Mutual Fund Advisory Committee (MFAC). If this goes through, fund managers can take exposure to such instruments after 30 days of putting up a public notice. Also, fund houses need not wait for the SEBI approval. Currently, fund houses are required to take approval of at least 75% of unit holders to incorporate such a change in the scheme which is time-consuming. Typically, fund managers take exposure to derivative instruments to hedge their portfolio. This strategy works well in volatile market conditions. SEBI has asked AMFI to work on the modalities and send it to the market regulator soon. AMFI is likely to discuss in the upcoming board meeting scheduled to be held on December 13, 2016.

Financial Planning Standards Board India has welcomed SEBI’s consultative paper on the amendments to the SEBI (Investment Advisers) Regulations, 2013. It has forwarded its suggestions to SEBI on some of the points on the Consultation Paper. “Several recommendations by SEBI are indeed laudable and it will go a long way towards streamlining the financial advisory services in the country thus making it more consumer-centric.” SEBI’s efforts to bring the Financial Planning services, under any garb, within the purview of the IA Regulations are well appreciated. Terms such as Financial Planning, Financial Planner etc. are being used in India indiscriminately and that leads to a lot of confusion amongst the consumers. According to FPSB, the proposed removal of ‘incidental advice’ by the distributors and other professionals is a welcome step and it would protect the investors from getting advice that may not necessarily be in their best interests. Incidental or limited advice is prone to misuse and has been viewed in the context of the prevalence of mis-selling. The Association believes that bringing all investment advice, like medical advice, meted out in popular, public, and social media needs to be discouraged as this is best left to the experts. Thus, differentiating between generic comments and specific financial advice requires some clarity. These ‘investment advisory’ discussions under the ambit of regulations would indeed help towards investor protection. Several of the amendments proposed are commendable and would serve to fast forward the Financial Planning industry, and further help the investor community. At the same time, initiatives towards establishing clarity and initiating steps to enable as well as to facilitate professional growth would be a progressive move. FPSB India opines that risk profiling is an important constituent of financial planning and therefore in the regulations, there is a scope to define the tools and processes for the same to avoid any ambiguities with respect to its fitness and limitations. Additionally, there should be a single point Redressal Mechanism for consumer grievances pertaining to financial products and investment advice. FPSB India says, “SEBI’s Draft Paper is a welcome step and with some modifications it would go a long way in changing the way investors could access personal finance advice from those who are competent to offer.”

NFO NEST

November 2016

There is a dearth of NFOs in the November 2016 NFONEST.

Birla Sun Life Resurgent India Fund – Series II

Opens: November 10, 2016

Closes: November 24, 2016

Birla Sun Life Mutual Fund has launched a new fund named as Birla Sun Life Resurgent India Fund - Series 2, a close ended equity fund. The tenure of the fund is 3.5 years from the date of allotment of units. The investment objective of the fund is to provide capital appreciation by investing primarily in equity and equity related securities that are likely to benefit from recovery in the Indian economy. The fund would invest 80%-100% of assets in equity and equity related securities with high risk profile and invest upto 20% of assets in cash, money market, and debt instruments with low risk profile. Benchmark Index for the fund is S&P BSE 200. The fund manager will be Mahesh Patil.

Axis Hybrid Fund – Series 35

Opens: November 11, 2016

Closes: November 25, 2016

Axis Mutual Fund has launched a new fund named as Axis Hybrid Fund Series 35, a 1359 days close ended debt fund. The primary objective is to generate income by investing in high quality fixed income securities that are maturing on or before the maturity of the fund whilst the secondary objective is to generate capital appreciation by investing in equity and equity related instruments. The fund will allocate 70% to 95% of assets in debt instruments including securitized debt with low to medium risk profile, invest upto 25% of assets in money market instruments with low risk profile and it would allocate 5% to 30% of assets in equity and equity related instruments with high risk profile. Investment in securitized debt would be up to 50% of the net assets of the fund. The fund shall not invest in foreign securitized debt. Benchmark Index for the fund is a combination of Crisil Composite Bond Fund Index (80%) and Nifty 50 Index (20%). The fund managers are Devang Shah (debt component) and Ashwin Patni (equity component).

IDFC Credit Opportunities Fund, Birla Sun Life Resurgent India Fund – Series 3, 4, and 5, UTI Long-term Advantage Fund – Series V, HSBC Capital Protection Fund – Series III (Plan I to IV), Mirae Asset Dynamic Bond Fund, Reliance Dada-Dadi Fund, Sundaram NIFTY 50 Equal Weight Fund, Reliance Nivesh Lakshya Fund, UTI Capital Protection Oriented Fund – Series IX, Sundaram Top 100 Series VI-VII, and Sundaram Value Fund Series VII - VIII are expected to be launched in the coming months. 

GEMGAZE

November 2016 

The combination of equity and tax-saving makes ELSS an ideal gateway to equity. There are many kinds of mutual funds and clearly, not all are suitable for every investor. However, ELSS funds are probably an exception. Everyone who is eligible for ELSS tax savings should invest in them. The benefits of ELSS go far beyond just the tax you save, or even the gains you make from the fund itself. ELSS funds' role as a gateway to equity investments makes them invaluable for everyone.

The consistent performance of two funds in the November 2015 GEMGAZE is reflected in those funds holding on to their esteemed position of GEM in the November 2016 GEMGAZE. Magnum Taxgain Fund, HDFC Tax Saver Fund, and Canara Robeco Equity Tax Saver Fund have been shown the exit door by virtue of their dismal performance while Birla Sun Life Tax Plan, Franklin India Taxshield Fund, and ICICI Prudential Long-term Equity Fund have been accorded a red carpet welcome.

Birla Sun Life Tax Plan Gem

Launched in 1999, the Rs. 422 crore Birla Sun Life Tax Plan is one of the oldest ELSS funds in the industry. Currently, large caps account for 47% of the portfolio. Portfolio allocations show the fund to be more small-cap oriented than its peers, with a 15-22% allocation to small cap stocks. With 51 stocks and the top 5 holdings accounting for 25.77%, the fund looks well diversified. The fund invests 52.23% in the top three sectors, i.e. finance, automobile, and services. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays and offers superior growth opportunities.  After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. In the past one year, the fund has earned a return of 10.42% as against the category average of 11.57%. Since inception, it has given an annual return of 20%. The expense ratio is 3.01% and turnover ratio is 2%.

Franklin India Taxshield Fund Gem

Launched in April 1999, the 2442 crore Franklin India Taxshield Fund is one of the oldest ELSS funds in the industry with a proven track record in bull and bear phases. This ELSS fund’s strategy has been to buy quality large caps or emerging large caps at a reasonable price, even in a category crowded with multi-cap funds. Currently, large caps account for 81% of the portfolio. Outpacing the benchmark in 12 of the last 15 years, this fund has proved more adept at containing losses in bear markets than in really acing its peers in runaway bull phases. The last two years, however, have seen the fund widen its outperformance vis-a-vis the benchmark and the category. The fund's bottom-up picks in automobiles and ancillaries, ports and pharma may explain part of this, as also its underweight positions in PSU banks, metals, and energy. The fund also avoids momentum stocks and sticks to bottom-up fundamentals-based investing. Though this fund is from a growth-style fund house, it tends to be quite valuation conscious. The fund does not take cash calls and remains fully invested through cycles. With 55 stocks and the top 5 holdings accounting for 26.28%, the fund looks well diversified. The fund invests 52.65% in the top three sectors, i.e. finance, automobile, and technology. Since inception the fund has given returns of around 25%. In the past one year, the fund has earned a return of 10.14% as against the category average of 11.57%. The expense ratio is 2.4% and turnover ratio is 19%. 

ICICI Prudential Long-term Equity Fund Gem

At Rs. 3745 crore, ICICI Prudential Long-term Equity Fund is one of the largest ELSS funds in the industry. Currently, large caps account for 54% of the portfolio. With 37 stocks and the top 5 holdings accounting for 28.23%, the fund looks well diversified. The fund invests 53.06% in the top three sectors, i.e. finance, healthcare, and technology. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on cheaper valuation and reasonable growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. A fund which has outpaced its benchmark over not one but three different market cycles, it has beaten its benchmark in 13 of the last 15 years. In the past one year, the fund has earned a return of 10.4% as against the category average of 11.57%. The expense ratio is 2.3% and turnover ratio is 138%. 

Religare Invesco Tax Plan Gem

With a corpus size of Rs. 340 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 47 stocks without being overly diversified and the top 5 holdings constitute 29.17%. The top three sectors are finance, automobile, and technology. Even though the fund currently has a large cap bias with 69% 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 8.59% as against the category average of 11.57%. Despite its relatively short history, the fund has consistently delivered returns for the investors. A fund that has managed to beat its benchmark through markets ups and downs in seven out of the eight years since launch, the fund prefers quality businesses with healthy growth prospects. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. Stock picking has been the key for success of this fund. The expense ratio is 2.49% and the portfolio turnover ratio is 31%.

DSPBR Tax Saver Fund Gem

Launched in 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 1496 crore. It has a growth-oriented multi cap portfolio with 69% of the corpus in large cap stocks. There are 65 stocks in the portfolio. The top 5 holdings constitute 22.32%. The top three sectors are finance, automobile, and healthcare. 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 18.64% returns for the last one year as against the category average of 11.57%. The expense ratio is 2.61% and the portfolio turnover ratio is 136%.

GEMGAZE

November 2016 

The combination of equity and tax-saving makes ELSS an ideal gateway to equity. There are many kinds of mutual funds and clearly, not all are suitable for every investor. However, ELSS funds are probably an exception. Everyone who is eligible for ELSS tax savings should invest in them. The benefits of ELSS go far beyond just the tax you save, or even the gains you make from the fund itself. ELSS funds' role as a gateway to equity investments makes them invaluable for everyone.

The consistent performance of two funds in the November 2015 GEMGAZE is reflected in those funds holding on to their esteemed position of GEM in the November 2016 GEMGAZE. Magnum Taxgain Fund, HDFC Tax Saver Fund, and Canara Robeco Equity Tax Saver Fund have been shown the exit door by virtue of their dismal performance while Birla Sun Life Tax Plan, Franklin India Taxshield Fund, and ICICI Prudential Long-term Equity Fund have been accorded a red carpet welcome.

Birla Sun Life Tax Plan Gem

Launched in 1999, the Rs. 422 crore Birla Sun Life Tax Plan is one of the oldest ELSS funds in the industry. Currently, large caps account for 47% of the portfolio. Portfolio allocations show the fund to be more small-cap oriented than its peers, with a 15-22% allocation to small cap stocks. With 51 stocks and the top 5 holdings accounting for 25.77%, the fund looks well diversified. The fund invests 52.23% in the top three sectors, i.e. finance, automobile, and services. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays and offers superior growth opportunities.  After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. In the past one year, the fund has earned a return of 10.42% as against the category average of 11.57%. Since inception, it has given an annual return of 20%. The expense ratio is 3.01% and turnover ratio is 2%.

Franklin India Taxshield Fund Gem

Launched in April 1999, the 2442 crore Franklin India Taxshield Fund is one of the oldest ELSS funds in the industry with a proven track record in bull and bear phases. This ELSS fund’s strategy has been to buy quality large caps or emerging large caps at a reasonable price, even in a category crowded with multi-cap funds. Currently, large caps account for 81% of the portfolio. Outpacing the benchmark in 12 of the last 15 years, this fund has proved more adept at containing losses in bear markets than in really acing its peers in runaway bull phases. The last two years, however, have seen the fund widen its outperformance vis-a-vis the benchmark and the category. The fund's bottom-up picks in automobiles and ancillaries, ports and pharma may explain part of this, as also its underweight positions in PSU banks, metals, and energy. The fund also avoids momentum stocks and sticks to bottom-up fundamentals-based investing. Though this fund is from a growth-style fund house, it tends to be quite valuation conscious. The fund does not take cash calls and remains fully invested through cycles. With 55 stocks and the top 5 holdings accounting for 26.28%, the fund looks well diversified. The fund invests 52.65% in the top three sectors, i.e. finance, automobile, and technology. Since inception the fund has given returns of around 25%. In the past one year, the fund has earned a return of 10.14% as against the category average of 11.57%. The expense ratio is 2.4% and turnover ratio is 19%. 

ICICI Prudential Long-term Equity Fund Gem

At Rs. 3745 crore, ICICI Prudential Long-term Equity Fund is one of the largest ELSS funds in the industry. Currently, large caps account for 54% of the portfolio. With 37 stocks and the top 5 holdings accounting for 28.23%, the fund looks well diversified. The fund invests 53.06% in the top three sectors, i.e. finance, healthcare, and technology. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on cheaper valuation and reasonable growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. A fund which has outpaced its benchmark over not one but three different market cycles, it has beaten its benchmark in 13 of the last 15 years. In the past one year, the fund has earned a return of 10.4% as against the category average of 11.57%. The expense ratio is 2.3% and turnover ratio is 138%. 

Religare Invesco Tax Plan Gem

With a corpus size of Rs. 340 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 47 stocks without being overly diversified and the top 5 holdings constitute 29.17%. The top three sectors are finance, automobile, and technology. Even though the fund currently has a large cap bias with 69% 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 8.59% as against the category average of 11.57%. Despite its relatively short history, the fund has consistently delivered returns for the investors. A fund that has managed to beat its benchmark through markets ups and downs in seven out of the eight years since launch, the fund prefers quality businesses with healthy growth prospects. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. Stock picking has been the key for success of this fund. The expense ratio is 2.49% and the portfolio turnover ratio is 31%.

DSPBR Tax Saver Fund Gem

Launched in 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 1496 crore. It has a growth-oriented multi cap portfolio with 69% of the corpus in large cap stocks. There are 65 stocks in the portfolio. The top 5 holdings constitute 22.32%. The top three sectors are finance, automobile, and healthcare. 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 18.64% returns for the last one year as against the category average of 11.57%. The expense ratio is 2.61% and the portfolio turnover ratio is 136%.

FUND FLAVOUR

November 2016

Beyond tax-saving - two birds with one stone!

The positioning of the Equity Linked Savings Scheme (ELSS) is unique within the universe of instruments in which one can save and invest to bring down the income tax liability. ELSS is also the most unique mutual fund scheme as it is open for investments to only individual taxpayers and HUFs (Hindu Undivided Families). This diversified equity fund is approved by the Central Board of Direct Taxes (CBDT) to qualify as a tax-saving instrument. So, investments in this fund qualify for tax exemption under Section 80C of the Income Tax Act, 1961. The mutual fund structure ensures that these funds come with the dual advantage of capital appreciation and tax benefits. What this means is that by investing in ELSS, you effectively hit two birds with one stone — you can claim deductions under Section 80C of up to Rs.1.5 lakh besides being capable of generating a substantial amount of profit on a long-term basis. ELSS funds come with a lock-in period of three years, which means you can redeem them only after 3 years.  This works to your benefit, because the fund manager is in a position to take the best picks and channelize your investments in the best stocks for optimal returns.

A smart option…

Though not fixed or guaranteed, ELSS funds do provide higher returns than the other tax-saving schemes under section 80C, like PPF and NSC.

ELSS funds also have the lowest lock-in period of three years, unlike the other tax-saving investment options listed under section 80C.

These funds offer a dividend option which gives you a regular income during the lock-in period.

You can choose to invest in an ELSS fund through a Systematic Investment Plan (SIP) if you do not have enough money to make a lump-sum investment at once. SIP is the best mode of investing in ELSS funds for a number of reasons. SIP helps you to stay disciplined in tax savings and investments. SIP is convenient. If you start a long term SIP in a good ELSS fund, your tax savings, at least as far as ELSS is concerned, is in an auto pilot mode. If you start your tax saving investments later in the year, you miss out on a large part of the returns, generated during the year. This is not just true for ELSS, but for other 80C investments as well. SIP may help you get superior long term returns through the principle of rupee cost averaging.

ELSS funds are also the most tax efficient of the 80C options available. Dividends paid from these investments are completely tax-free, and capital gains received at the end of the three-year lock-in period are completely exempt from tax as well as they qualify as long-term capital gains from equity instruments.

…and the caveats

ELSS investments are equity mutual funds and have all the risks associated with the equity market. With a lock-in period of 3 years the risk factor seems augmented in the case of ELSS, but diversification of funds over a long period of time mitigates the associated risks. The good news is that the recent market analysis paints a much better performance picture for ELSS funds than the other diversified funds. ELSS funds have given an annual return of over 15%, whereas the diversified mutual funds over the same range of time have performed marginally lower than ELSS funds, at 14.3% annual returns.

In addition, 3-year lock-in period means less liquidity for the investor but it is a matter of solace for the fund manager, who is reliable in making long term investment decisions. These decisions invariably turn out to be beneficial for the investor.

Some people like to take SIP route for their ELSS investment. In such an event, each SIP installment is regarded as a separate investment and each of these monthly installments is locked for a period of 3 years.  For example, if you make a SIP payment in January of 2016 then you will be eligible for a withdrawal only in January 2019. And for your next SIP installment in February 2016, the withdrawal time will be February of 2019. So if there is no constraint on how much you can invest, then investing a lump sum annually or quarterly is a better choice than to go for the SIP option.

Tax benefits on investment in ELSS may soon be phased out with the introduction of direct tax code.

Ahead of the herd

At present, there are 22 ELSS schemes to choose from, which collectively manage assets amounting to Rs.37,290 crore, which is 12% of the equity component of the mutual fund industry assets according to AMFI. What this means for you as a taxpayer is that you can use the different benchmarks, portfolios, and investment approaches to select a fund that allows you to meet your twin needs of tax saving and wealth creation. These schemes have gone ahead to deliver superior returns than regular open-ended, non-ELSS mutual funds, due to certain inherent features of the scheme. Namely, ELSS funds, in general follow a passive and growth style of investment, which allows fund managers to take longer term calls and sustain it. The redemption pressure is the lowest in these schemes, compared to regular funds that again give the fund managers the leeway to take long term calls, especially in mid and small sized companies. Thanks to the ease of investing and the continued patronage of fiscal policymakers, today ELSS funds stand deviated from age-old LIC-for-tax-saving mindset and in turn provide the business world with the household supply of capital. Almost every fund house, excluding few newer ones, offers at least one ELSS product as part of its product portfolio. There are schemes that have been consistently delivering better returns than their own non-ELSS counterparts. That does not mean, an individual can consider investing all his ELSS allocation into one fund, nor does it also mean he can take smaller exposures into a number of funds. Remember, too much diversification eats away into the superlative performance of any individual fund. ELSS did not just beat diversified equity mutual funds in terms of average category returns; it also beat diversified equity funds in terms of most other category parameters like maximum return within category, minimum return within category, and median category returns.

Choice considerations

      It is advisable that the fund should be well settled in terms of its capital. So, Assets Under management (AUM) should be approximately greater than Rs. 1000 Cr.

         If the fund is performing well in the past, it is expected that the fund will keep performing well in the future. Generally we look at the past 3 year, 5 year, and 10 year returns of the fund.

·         Lower the expense ratio, higher the returns.

·        Beta is the volatility measure and tells how much the fund changes for a given change in the Index. Lower the beta, lower the volatility. Hence, your fund must have lower beta.

·     Standard deviation indicates the extent of deviation of fund returns from the average. Lower the standard deviation, lower the volatility. Hence, your fund must have lower standard deviation.

·        Sharpe ratio is used to calculate risk factor of the fund’s portfolio. Sharpe ratio of the fund should be close to 1.

·       Alpha is the risk-adjusted measure. By taking risks, how much the fund manager generated returns over the benchmark. Higher the alpha, higher the out performance of the fund.

·        Information Ratio is calculated by average excess return obtained compared to a benchmark and divided by the standard deviation of excess returns. Higher the information ratio, higher the consistency in beating the benchmark.

·         R-squared is the measure of how correlated the fund’s NAV movement is with its index.

Equity exposure to battle inflation

One of the biggest challenges that every taxpayer faces is to preserve the value of his money; basically ensure that it does not lose its worth, which is possible only if it beats inflation. The only known asset class that beats inflation in the long run is equity and it is for this reason that every taxpayer should make the most of the available tax deduction that can be deployed in suitable equity instruments. Compared to other fixed-return options, ELSS is the only option with significant equity orientation as a tax saver. Though the National Pension System (NPS) and even ULIPs have equity exposure, it is never as high as what ELSS tends to have. ELSS has a minimum exposure of 65% to equities compared to the maximum exposure of 50% allowed under the NPS and 40% in retirement plans from mutual funds. If you look a bit deeper into the equity allocation of some of the ELSS funds, it goes as high as 80-85%, or more. Yes, this does expose your investments to higher risk, however, the three-year lock-in when investing in these funds buffers the risk significantly.

Investors should always remember that, conditions in equity markets are constantly changing affecting the asset prices; volatility is an intrinsic characteristic of equity as an asset class. While, volatility is a function of investment horizon and decreases as the horizon lengthens, anecdotal evidence shows us that, fund managers who were able to outperform the market when it was rising and at the same time protected against downside when it was falling, were able to give superior long term returns and a majority of the ELSS funds fit the bill.