Best ELSS Funds for tax saving

Madhusudhanan Raghunathan
madhur@orowealth.com
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Equity Linked Savings Scheme (ELSS) are tax saving mutual funds which provide an investor with the tax-saving benefit of up to Rs 1.5 Lakh under section 80 C of the Income Tax Act. An investor may invest more than Rs 1.5 lakh in these schemes but the excess amount over Rs 1.5 lakh will not qualify for an exemption.

We, at ORO, have shortlisted top 3 ELSS funds to invest in 2018-19. These funds are picked based on the following parameters:
• Returns over the past 3 years
• Returns over the past5 years
• Asset under the management of more than Rs. 500 crores (as it provides confidence to retail investors)
• Attractive risk-return profile with a beta close to 1
• Low standard deviation.

Based on our analysis, the following are the funds an investor should look to invest in 2018-19. For each of the funds, we have provided a table of past returns, its rank, portfolio allocation across stocks and sectors, other important indicators like P/PE, beta, Sharpe ratio, Standard Deviation, etc. Let’s have a look

Fund 1 – Birla Sun Life Tax Relief 96 – Direct Plan

PerformanceYTD1Y3Y5Y
Absolute returns (%)0.0939.9815.7523.55
Category (%)2.1035.1913.2719.63
Category rank7812157
Portfolio P/PE42.263Y-Portfolio Beta0.91Top 10 Companies (%)52.23
Portfolio P/B5.593Y-R-squared (%)80.00Top 3 Sectors (%)49.39
3Y-Sharpe Ratio1.003Y-Std Deviation (%)13.57AUM (Rs. Bn)4,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Value Research; Returns as of Jan 24, 2018; Portfolio information as of December 2017; Category: Equity – Tax Saving

Review:

  • The scheme seeks to generate long-term capital growth by investing over 80% of the portfolio corpus in equities. The fund is one of the oldest ELSS funds and has been consistently generating alpha over benchmark and category average over the multi-trailing time period. The fund follows a combination of both top-down approach and bottom-up approach while selecting stocks and ensures investment is made only in fundamentally sound stocks that are trading at a discount from its intrinsic value.
  • The fund follows a multi-cap strategy and has a quarter of portfolio allocation to giant cap stocks followed by 14% and 53% in large-cap and mid-cap stocks respectively. Due to a higher weight in the mid-cap segment, the fund struggled to beat its benchmarks and peers in 2010 and 2011. Also, due to re-shuffling of the portfolio in 2006, the fund underwent through some turbulence when Ajay Garg took over. Since then, the fund has remained very stable.
  • In terms of risk, the fund has a beta of 0.91 and is fairly balanced when it comes to correlation with the market. The fund performance is purely derived from the performance of underlying securities and allocation effect remains low. With the standard deviation of 13.54%, the fund has lower volatility than category thereby making the risk-reward profile attractive. The fund is fairly concentrated with 50 names of which top-10 accounts for more than half of the portfolio corpus.

About the fund manager:

Ajay Garg is the portfolio manager of the fund. With over 15 years of experience in the financial services industry, Garg is known to invest primarily in mid-and small-cap stocks. Ajay is associated with Aditya Birla Sun Life Asset Management Company since 2003 and was associated with Birla Sun Life Securities Ltd prior to that. He holds a BE in electronics and an MBA in finance.

Fund 2 –Franklin India Taxshield – Direct Plan

PerformanceYTD1Y3Y5Y
Absolute returns (%)1.6227.3511.4719.61
Category (%)2.1035.1913.2719.63
Category rank54734831
Portfolio P/PE26.743Y-Portfolio Beta0.85Top 10 Companies (%)40.15
Portfolio P/B3.073Y-R-squared (%)88.00Top 3 Sectors (%)55.32
3Y-Sharpe Ratio0.643Y-Std Deviation (%)12.16AUM (Rs. Cr)3565

Source: Value Research; Returns as of Jan 24, 2018; Portfolio information as of December 2017; Category: Equity – Tax Saving

Review

  • The scheme seeks to generate medium-to-long term growth in capital and provides income tax rebate. The fund invests in equities and also takes exposure to money market instruments as well.
  • The fund is an established fund in the category and has been able to generate consistent alpha over benchmark over multi-trailing time periods. The fund has maintained a large-cap bias amid different market phases that have resulted in the consistency of returns and has also provided the fund with an ability to contain downside risk. The fund has over 62% allocation to giant cap names followed by 17% and 16% in large and mid-cap stocks respectively. The fund sticks to the bottom-up approach stock selection process to include stocks in the portfolio and tends to avoid momentum stocks.
  • In terms of risk, the fund has a beta of 0.85 and shows a more conservative approach in relation to the benchmark. Further, the standard deviation at 12.17% is lower than the category average at 14.22%. The fund is fairly concentrated with 58 names and remains fully invested at all times with nearly 10% allocation to cash and cash equivalents.

About the fund manager:

Mr. Lakshminath Reddy and Janakiraman Rengaraju are the fund managers for the fund. Mr. Lakshmikanth Reddy is the portfolio manager since May 2016. He has over 21 years of experience and was associated with ICICI Prudential Life Insurance Company Limited as Head of Equities prior to joining Franklin. Before joining ICICI, Reddy took up roles with multiple organizations namely HSBC Capital Markets, ABN Amro Asia Equities, Unit Trust of India and Crompton Greaves. He holds a B.Tech in Mechanical Engineering from Jawaharlal Nehru Technical University, Hyderabad and a Post Graduate Diploma in Management from Indian Institute of Management, Ahmedabad.

Janaki Raman Rengaraju is the portfolio manager since May 2016. He has been in the investment management industry for over 14 years. Prior to joining Franklin Templeton, he was responsible to manage the corpus of Chennai based Indian Syntans Group. He has also worked with UTI Securities.

Mr. Rengaraju holds an MBA from Indian Institute of Management, Bangalore and a Bachelor of Engineering from Government College of Technology in Coimbatore. He is a Chartered Financial Analyst (CFA) charter holder.

Fund 3 – DSP BlackRock Tax Saver Fund-Direct Plan

PerformanceYTD1Y3Y5-Y
Absolute returns (%)2.2632.5416.2122.17
Category (%)2.1035.1913.2719.63
Category rank34541315
Portfolio P/E27.343Y-Portfolio Beta1.00Top 10 Companies (%)33.48
Portfolio P/B2.953Y-R-squared (%)86.00Top 3 Sectors (%)56.92
3Y-Sharpe Ratio0.833Y-Std Deviation (%)14.52AUM (Rs. Crore)3833.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Value Research; Returns as of Jan 24, 2018; Portfolio information as of December 2017; Category: Equity – Tax Saving

Review:

  • The scheme seeks to generate medium to long-term capital appreciation by investing in a diversified portfolio comprising of equity and equity-related securities. The scheme is aimed at enabling investors’ avail of deduction from total income, as permitted under the income tax act.
  • The fund is a play-it-safe fund which has outperformed its benchmark and peers across multi-trailing time periods. The fund’s alpha has been impressive relative to category and benchmark over the years and annualized returns are over and above benchmark by 5-6% when compared to other funds in the category. The fund does not follow any style in particular and thus, is a blended fund comprising of both value and growth stocks. The fund manager though invests across entire market cap spectrum but ensures giant cap stocks account for more than 50% of the portfolio allocation followed by 18% in large-cap and equivalent in small-cap.
  • On the risk front, the fund has a beta of 1 that ensures the fund manager seeks to manage a balanced portfolio and performance of the portfolio is not carried away with market distress and the returns are purely generated by underlying securities. Also, the standard deviation at 14.52% is fairly in line with the category average of 14.22% thereby making risk-reward profile attractive for the fund. Further, the fund is fairly diversified with 72 stocks and top 10 names account for one-third of the portfolio. Lastly, it is worth mentioning that the fund has seen a change in fund manager in 2015 post that its allocation to large-cap names has been higher. Thus, the past performance might not be the true guide to what to expect in future.

About the fund manager:

Mr. Rohit Singhania is the fund manager for the fund. He is associated with DSP BlackRock since September 2005 as Portfolio Analyst in its Portfolio Management Services division. Prior to joining DSP, he was a part of the Institutional Equities Research desk at HDFC Securities Limited and an Equity Analyst at IL&FS Investmart Limited. Singhania received an MMS in Finance from the University of Mumbai and also holds a B.Com. degree.

Advantages and Disadvantages of ELSS Funds

AdvantagesDisadvantages
  • Tax exemption up to Rs 1.5 lakhs u/s 80C
  • Higher returns compared to other tax saving schemes such as PPF, NSC, tax saver fixed deposit
  • Lock-in of three years against six years and fifteen years in NSC and PPF respectively
  • No guaranteed returns as investments are made in equities thus resulting in higher risk as compared to other tax saving instruments such as PPF, NSC etc.
  • No premature withdrawal is allowed
Madhusudhanan Raghunathan
madhur@orowealth.com
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