Want to choose ELSS ?
Want to choose the right equity-linked savings scheme for claiming deduction up to Rs 1 lakh, but can’t decide which one will suit you best? Muthukumar K sorts out the confusion for you.
IT’S THE middle of the tax season and mutual funds have started their usual barrage of advertising to peddle equity-linked savings schemes (ELSS). Things can’t get more complicated for those of us who, more often than not, leave our tax planning right till the end of the financial year. While options like Public Provident Fund (PPF), National Savings Certificate (NSC), provident fund (PF), paying insurance premium etc can be used to claim a deduction of up to Rs 1 lakh under Section 80C of the Income Tax Act, choosing the right ELSS is not that simple.
RESOLVING THE ‘I’ CRISIS
The confusion gets more confounded as there are currently 17 ELSS schemes to choose from. But the catch is that all of them do not operate on the same risk and return parameters. Therefore, the first question which you need to ask yourself is whether you are a conservative investor or a risk-taking investor.
An analysis by ET Investor’s Guide shows that for conservative investors, HDFC Long Term Advantage, Sundaram Tax Saver, HDFC Tax Saver and Principal Tax Savings suit the bill. They have come out toppers in terms of performance in the past three years, managing higher returns by taking lower risk. For those investors who are not averse to risk and need to add that extra zing to their returns, PruICICI Tax and SBI Magnum Tax Gain seem better bets. Their historical performances indicate investment strategies that fall under the category of high-risk high-return funds.
HISTORY MATTERS
For the risk parameter, ET Investor’s Guide looked at the overall underperformances (downside risk) of these funds over the past three years. Since such a time horizon doesn’t stretch to the bear markets, we also studied the performance of funds during the bear market (’00 and ’01) phase to find similar trends in terms of the risk-return of these categories of funds.
The year ’00 was the year of technology crash, which saw many of the then techheavy ELSS funds underperforming the market. On an average, ELSS returns were a negative 22.5% and negative 22.1% in ’00 and ’01, respectively. Some of the largersized funds like SBI Magnum Tax Gain gave negative returns of around 46% each in both the years. PruICICI Tax lost 41% in ’00, while losing only 6% in ’01. But on an overall basis, these funds still managed to give more-than-average returns over the past five years. So across market cycles, these schemes are still worth a pick. While history is no indication of future performance, funds like HDFC Tax Saver, Sundaram Tax Saver and FT Taxshield, have done well in a bear market. In fact, HDFC Tax Saver and FT Taxshield were two of the three funds which gave positive returns in ’00. Some of these funds were helped by timely exits from the technology sector. HDFC Long Term Advantage fund’s returns are not comparable since the fund did not exist during ’00 and ’01.
THE MIDDLE KINGDOM
Most ELSS funds have an element of mid caps in their portfolio —at least that is what the portfolio of latest ELSS funds show. The underperformance of such funds vis-a-vis the Sensex, to an extent, can be explained by the fact that mid-cap stocks haven’t rallied the way large-caps stock did in the past one year. The largest ELSS fund, SBI Magnum Tax Gain (Rs 1,163 crore), had 60% in mid and small caps, HDFC Tax Saver had 44%, FT Taxshield 54% and PruICICI Tax 95%, which is the highest return recorded among the ELSS category of funds.
IS LESS MORE?
Even after you have zeroed in on the type of ELSS that suits you, the method you will use to invest in the fund seems to have its effect on portfolio returns. That is what number crunching shows. For instance, among the funds with higher risk-taking propensities, the divergence of returns from one-time investing to SIP way has been found to be on the higher side.
Take for instance, HDFC Long Term Advantage, whose SIP returns for five years were around 56% p.a., same as that for its five-year point-to-point returns. It was on the higher side for SBI Magnum Tax Gain, whose five-year returns were 60% p.a., while SIP returns touched 74% p.a. Higher volatility of NAV does give opportunities to buy units at lower values, which sometimes helps to generate more returns than one-time investing. So, as a rule, ensure that you use the SIP way of investing if you are investing in high-risk high-return funds.
A HAPPY ENDING
ELSS is an option among Section 80C investments that is fully invested in equities. As a fund category, ELSS has under-performed diversified equity schemes. But tax or no tax benefits, ELSS as a category still is a good avenue to invest — especially for retail investors.
Firstly, the names of ELSS are boring and therefore, one quickly gets to know what the scheme mandates are. Most of the schemes are named ABC Tax Saver, XYZ Tax Gain or PQR Taxshield and so on. Secondly, the fact that the fund has a lockin keeps short-term investors out of the assets. This brings more stability to the firm. Lastly, ELSS fund managers actually seem to follow what they preach and hold stocks for the long term, at least relatively, by resorting to lesser churn of their portfolio.
IT’S THE middle of the tax season and mutual funds have started their usual barrage of advertising to peddle equity-linked savings schemes (ELSS). Things can’t get more complicated for those of us who, more often than not, leave our tax planning right till the end of the financial year. While options like Public Provident Fund (PPF), National Savings Certificate (NSC), provident fund (PF), paying insurance premium etc can be used to claim a deduction of up to Rs 1 lakh under Section 80C of the Income Tax Act, choosing the right ELSS is not that simple.
RESOLVING THE ‘I’ CRISIS
The confusion gets more confounded as there are currently 17 ELSS schemes to choose from. But the catch is that all of them do not operate on the same risk and return parameters. Therefore, the first question which you need to ask yourself is whether you are a conservative investor or a risk-taking investor.
An analysis by ET Investor’s Guide shows that for conservative investors, HDFC Long Term Advantage, Sundaram Tax Saver, HDFC Tax Saver and Principal Tax Savings suit the bill. They have come out toppers in terms of performance in the past three years, managing higher returns by taking lower risk. For those investors who are not averse to risk and need to add that extra zing to their returns, PruICICI Tax and SBI Magnum Tax Gain seem better bets. Their historical performances indicate investment strategies that fall under the category of high-risk high-return funds.
HISTORY MATTERS
For the risk parameter, ET Investor’s Guide looked at the overall underperformances (downside risk) of these funds over the past three years. Since such a time horizon doesn’t stretch to the bear markets, we also studied the performance of funds during the bear market (’00 and ’01) phase to find similar trends in terms of the risk-return of these categories of funds.
The year ’00 was the year of technology crash, which saw many of the then techheavy ELSS funds underperforming the market. On an average, ELSS returns were a negative 22.5% and negative 22.1% in ’00 and ’01, respectively. Some of the largersized funds like SBI Magnum Tax Gain gave negative returns of around 46% each in both the years. PruICICI Tax lost 41% in ’00, while losing only 6% in ’01. But on an overall basis, these funds still managed to give more-than-average returns over the past five years. So across market cycles, these schemes are still worth a pick. While history is no indication of future performance, funds like HDFC Tax Saver, Sundaram Tax Saver and FT Taxshield, have done well in a bear market. In fact, HDFC Tax Saver and FT Taxshield were two of the three funds which gave positive returns in ’00. Some of these funds were helped by timely exits from the technology sector. HDFC Long Term Advantage fund’s returns are not comparable since the fund did not exist during ’00 and ’01.
THE MIDDLE KINGDOM
Most ELSS funds have an element of mid caps in their portfolio —at least that is what the portfolio of latest ELSS funds show. The underperformance of such funds vis-a-vis the Sensex, to an extent, can be explained by the fact that mid-cap stocks haven’t rallied the way large-caps stock did in the past one year. The largest ELSS fund, SBI Magnum Tax Gain (Rs 1,163 crore), had 60% in mid and small caps, HDFC Tax Saver had 44%, FT Taxshield 54% and PruICICI Tax 95%, which is the highest return recorded among the ELSS category of funds.
IS LESS MORE?
Even after you have zeroed in on the type of ELSS that suits you, the method you will use to invest in the fund seems to have its effect on portfolio returns. That is what number crunching shows. For instance, among the funds with higher risk-taking propensities, the divergence of returns from one-time investing to SIP way has been found to be on the higher side.
Take for instance, HDFC Long Term Advantage, whose SIP returns for five years were around 56% p.a., same as that for its five-year point-to-point returns. It was on the higher side for SBI Magnum Tax Gain, whose five-year returns were 60% p.a., while SIP returns touched 74% p.a. Higher volatility of NAV does give opportunities to buy units at lower values, which sometimes helps to generate more returns than one-time investing. So, as a rule, ensure that you use the SIP way of investing if you are investing in high-risk high-return funds.
A HAPPY ENDING
ELSS is an option among Section 80C investments that is fully invested in equities. As a fund category, ELSS has under-performed diversified equity schemes. But tax or no tax benefits, ELSS as a category still is a good avenue to invest — especially for retail investors.
Firstly, the names of ELSS are boring and therefore, one quickly gets to know what the scheme mandates are. Most of the schemes are named ABC Tax Saver, XYZ Tax Gain or PQR Taxshield and so on. Secondly, the fact that the fund has a lockin keeps short-term investors out of the assets. This brings more stability to the firm. Lastly, ELSS fund managers actually seem to follow what they preach and hold stocks for the long term, at least relatively, by resorting to lesser churn of their portfolio.
posted by Rushikesh Pandya at
9:27 PM
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