Category Archive : Tax Saving Funds

ELSS

How To Choose Best ELSS Fund?

Selection of Tax Saving Fund

introduction

ELSS is one of types of Equity Oriented Mutual Fund. Equity Linked Saving Schemes / Funds give dual benefit viz opportunity to invest in equity mutual funds and tax saving. In the earlier article, we have seen the common mistakes to be avoided while investing in an ELSS fund. In this article, we will discuss the parameters based on which ELSS fund should be chosen.

general features of tax saving fund

  • ELSS funds have around 80% investment in equity instruments.
  • Most of the funds in this category provide for the rate of return between 15% to 20%, if investor invests for a period between 5-10 years in ELSS.
  • ELSS are tax deductible up to Rs. 1,50,000 under section 80C.
  • Being Tax Saver Fund, ELSS come up with a lock-in-period of 3 years. i.e. ELSS funds cannot be redeemed before completion of 3 years from the date of investment.
  • ELSS funds can be redeemed after expiry of 3 years. LTCG is taxable @ 10% without indexation

Parameters to Choose Suitable ELSS Fund

How to Choose Best ELSS Fund
How to Choose Best ELSS Fund

1. Market cap composition

  • As a general rule, ELSS fund requires at least 80% of its investment in equity instruments. However, there is no restriction on the % allocation in particular equity instrument.
  • SEBI has given a full flexibility to fund manager to decide the % allocation in stocks (i.e. Large Cap / Mid Cap / Small Cap). Manager decides the allocation on the basis of the market conditions, objective of the fund, and his own risk-taking capability to achieve that objective.

Note: SEBI gives ranking to all the listed companies based on their market capitalization. According to the market capitalization, these companies are broadly categorized as Large Cap, Mid Cap and Small Cap Companies. SEBI reviews the market capitalization periodically and revises the categorization of the companies. Now, based on the above categorization –

  1. Large Cap companies are the top 100 companies as per SEBI Ranking based on market capitalization. These companies are the stable companies which give moderate returns with lower risk. One should invest in these companies for appx. 5-7 years. Example: Infosys, TCS, HDFC, ICICI, L&T etc.
  2. Mid Cap Companies are next 150 companies i.e. companies from 101 to 250 as per SEBI ranking based on market capitalization. These companies give higher returns as compared to large companies. However, the risk involved is also higher than large cap companies. One should invest in these companies for minimum 7-10 years to get the desired returns.
  3. Small Cap Companies are the companies not categorized as Large Cap or Mid Cap Companies as per SEBI. These companies come up with Highest Return potential as well as involves highest risk factor amongst all the categories.

Also, review the past trend of market cap allocation of the fund and stability of its investment patterns. One should prefer to choose the funds with steady investment pattern rather than frequently changing investment pattern as this involves the higher risk. You can get last 10 year market cap allocation trend at https://MFYadnya.in

2. Risk Involved and Expected Returns

  • Risk and returns on investments are interlinked.  Mutual Funds delivering higher returns come up with higher risks and the mutual funds delivering lower returns involve lower risk as compared the others.
  • Therefore, the key to decide your suitable Tax Saving Fund is to understand your risk profile first i.e. understand that how much risk you can take while investing in the mutual funds.
  • If you are an aggressive investor, (i.e. if you are ready to take high risk) then you can keep choose a fund having higher allocation in mid-cap or small cap stocks. However, for achieving the desired rate of return, investor must keep his mutual fund investment intact for at least 7-10 years.
  • If you are a conservative investor, (i.e. if you wish to play safe) then you can choose the ELSS fund having maximum of its investment in Large Cap Stocks which are quite stable and less risky than the other two categories. (i.e. Mid Cap and Small Cap). However, for achieving the desired rate of return, investor must keep his mutual fund investment intact for at least 5-7 years.

Risk involved can also be understood from ratios like Standard deviation, Beta and Alpha.

3. Review of Returns of the ELSS Funds

  • While investing in mutual fund, investor must review the trend of the fund in respect of rate of returns delivered. Also, he should consider the rate of return as well as the consistency with which those returns are delivered. While reviewing it is advisable to track the records for at least 8-10 years of the fund.
  • This is an ideal duration, because by that time fund goes through the multiple cycles of ups and downs in the market. This helps the investor to track the performance of the fund in all the situation.
  • While reviewing the performance of the fund, investor should focus more on the following returns:
  1. Annualized Returns i.e. CAGR
  2. Trailing Returns
  3. Calendar Returns
  4. Rolling Returns

Note:

  • Annualized Returns i.e. CAGR: Annualized Returns (CAGR) means the returns received by the investor on yearly basis for the given period of time.
  • Trailing Returns: Trailing Returns are the annualized returns for a specific period viz. for past 1 / 3 / 5 / 7 / 10 years. These returns can be utilized to understand the performance of the fund in the recent past. However, if a fund has performed exceptionally well in a particular year, then it can improve the % returns of the returns in 3 / 5 / 7 years. Therefore, one must not rely ONLY on the trailing return.
  • Calendar Returns: Calendar returns are the absolute returns from 1st January to 31st December each year. It gives you the rate of return of each year during the ups and downs in the market. Investor must compare the calendar returns with the benchmark and the category average.
  • Rolling Returns These are useful for reviewing the behavior of returns in the period of investment. It highlights the highest and lowest returns in the given period of time.
  • To summarize, A mutual fund with a strong and consistent track record of CAGR, Calendar and trailing returns along with the history of at least 8-10 years can be shortlisted while taking investment decision.

4. Expense Ratio of TAX SAVING FUNDS

  • While investing in Tax saving funds, investor should also consider the expense ratio of the fund. High expense ratio of the fund shows the high amount of expenses paid by the fund.
  • Expense ratio in this category ranges between 1.46% to 2.99%. Investor should choose the fund with low or moderate expense ratio along with the higher rate of returns.
  • Note: Expense ratio is the fees charged by the mutual funds for managing the money invested by the investors. This includes the following:  
  1. Registrar fee
  2. Fund Management
  3. FeeDistributors’ Commission
  4. Advertising Expenses
  5. Auditor’s and Custodians share etc.

5. Fund Manager

  • Another important factor to understand the probability of return consistency in future.
  • If a fund has a good and consistent fund manager who has given good performance in the past, then it can be safely assumed that fund will give good returns in the future too.
  • Always check fund manager’s profile and his record not just in this fund but other funds he/she manages.

6. Fund House

  • This is an important factor to select the Tax Saving fund. Investor shall consider an established fund house rather than new fund houses.
  • It is because, when a fund house is established, it has an experience to handle the large amount of investments.
  • Decision making processes are set, therefore, change in the fund manager does not impact the returns delivered by the fund too much.
ELSS investment

Mistakes to be Avoided While Buying an ELSS Fund

Things should be taken care of while Investing in Tax Saving Funds(ELSS)

introduction : elss funds

While tax planning may seem to be a difficult process, Mutual Funds offer us a simple way to get tax benefits, while aiming to make the most of the potential of the equity markets. An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn’t just help us save tax, but also gives us an opportunity to grow our money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act. It is true and the attraction point for most investors. Still we should not limit our vision but use this investment instrument to its full potential.

Being equity linked investment, it is the riskiest investment option amongst all the other 80C investments. Therefore, while investing in ELSS, investor should take care.

5 MIstakes to be Avoided while Buying ELSS Fund
5 MIstakes to be Avoided while Buying ELSS Fund

1. Do not invest late during the year and avoid lumpsum investment.

  • We usualy consider Investment in ELSS only as a tax saving option. Therefore, the investment is done with a view to complete the investment of Rs. 1,50,000. As the investment is made late in the financial year, most of the times investors tend to invest in lumpsum.
  • We do not recommond this strategy especially for salaried class. When you invest in lumpsum, you are basically timing the stock market and putting a large sum at that time. This strategy can be helpful if markets are undervalued and can be bad if markets are overvalued, so therefore higher risk. Whereas if you take SIP route, you get help of stock market averaging. Thus you can invest your money in whole cycle.

2. Do not invest in too many elss funds

Many investors invest in a new Tax Saving Fund every year. This causes excessive diversification of funds. similarly, it becomes difficult to handle and monitor the portfolio. Investor should shortlist the best ELSS funds, select one of those funds and should invest only in one ELSS fund.

3. Do not redeem the money after 3 years

  • As a tax saving tool, ELSS offer the shortest lock-in-period of 3 years. As stated earlier, many investors tend to invest in ELSS just to complete the tax deduction limit of Rs. 1,50,000 under section 80C and therefore, sell the funds immediately after completion of 3 years.
  • However, this strategy is not at all recommended. Investment in ELSS should be linked with the long-term goal and it should be treated as any other Equity Mutual Fund, where recommended investment duration is minimum 5 to 15 years. So we should keep the same investment duration for ELSS.

4. Do not choose dividend option

  • When a dividend option is chosen, either dividend is paid on a regular basis, or it gets reinvested. Any dividend option ultimately reduces the NAV and therefore the returns.
  • On the other hand, if dividend reinvestment option is chosen, then the lock-in-period of 3 years is counted from the date of reinvestment, therefore, every time dividend is reinvested, that dividend amount is locked for a period of 3 years from the date of such reinvestment. Therefore, in any case, we don’t recommond dividend re-investment option as far as ELSS are concerned.
  • Therefore, to achieve the maximum compounding benefit and maximum rate of return, investor should always invest under a Growth Option.

5. Consider the long term returns rather than short term returns

  • As explained earlier, while selecting ELSS, investor should focus more on long term returns and consistency of the same. Ideally, we recommond fund with a strong track record of at least 6-8 years. If an ELSS fund has a track record older than 8 years, then such fund should be definitely shortlisted for investment purpose.
  • To know more about the analysis of ELSS funds. Please visit our YouTube video.

HDFC Tax Saver Fund !

Category : Tax Saving (Equity)

AUM: Rs. 7,017 Crore

Benchmark : Nifty 500

Portfolio:

Large Cap Stocks : 81%

Mid Cap Stocks : 14.5%

Small Cap Stocks: 4.5%

Top 5 Holdings: 

  1. HDFC Bank (7.31%)
  2. ICICI Bank (7.11%)
  3. SBI (6.82%)
  4. NTPC (5.85%)
  5. Reliance Industries Ltd (5.42%)

Top 5 Sector Allocations:

  1. Banks (24.42%)
  2. Power (10.35%)
  3. Construction Project (8.75%)
  4. Software (7.27%)
  5. Petroleum Products (6.89%)
24 Mar 2018 - HDFC Tax Saver Calendar
24 Mar 2018 - HDFC Tax Saver Trailing

ICICI Prudential Long Term Equity Fund !

Category : Tax Saving (Equity)

AUM: Rs. 5,034 Crore

Benchmark : Nifty 500

Portfolio:

Large Cap Stocks : 69.5%

Mid Cap Stocks : 28.5%

Small Cap Stocks: 2%

Top 5 Holdings: 

  1. NTPC (4.93%)
  2. SBI (4.47%)
  3. Nestle India (4.06%)
  4. HDFC Bank(4.00%)
  5. ITC (3.86%)

Top 5 Sector Allocations:

  1. Financial Services (23.38%)
  2. Energy (11.61%)
  3. Healthcare (10.66%)
  4. FMCG (10.16%)
  5. Automobiles (10.06%)

23 Mar 2018 - ICICI Pru Long Term Equity Calendar
23 Mar 2018 - ICICI Pru Long Term Equity Trailing

Tata India Tax Savings Fund !

Category : Tax Saving (Equity)

AUM: Rs. 1,219 Crore

Benchmark : Sensex

Portfolio:

Large Cap Stocks : 58%

Mid Cap Stocks : 32%

Small Cap Stocks: 10%

Top 5 Holdings: 

  1. ICICI Bank (3.95%)
  2. Reliance Industries Ltd (3.91%)
  3. HDFC Bank (3.09%)
  4. HDFC (2.68%)
  5. Tata Motors (2.46%)

Top 5 Sector Allocations:

  1. Financial Services (27.47%)
  2. Construction (12.99%)
  3. Energy (10.08%)
  4. Services (8.77%)
  5. Healthcare (7.11%)
22 Mar 2018 - Tata Tax Saver Calendar
22 Mar 2018 - Tata Tax Saver Traling

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