TOP 7 MUTUAL FUND ELSS SCHEMES

ELSS: Smart Link To Save Tax With Good Returns 

With only three months left for the financial year to end, most of the investors may have started their search for the best tax saving instruments. From among the various conventional options available such as Public Provident Fund, National Saving Schemes, ULIPs, etc., EAs ELSS has a lock-in period of three years, we review the performance of our recommendations
given three years ago. We recommended five ELSS schemes in our issue dated 25 Jan 2015 issue
number 3, volume 30 under ‘5 Best Equity Linked Savings Schemes’. The average return
generated by our recommendation is 41 per cent. This return is after adding all the dividends
distributed by the funds during the period. If we annualised the returns, it works out to 18.75 per
cent. Against this, the total return generated by ELSS category in the same period is 14.94 per
cent. Even if we compare the returns againstLSS definitely comes out as 'first among equals' because it not only helps save tax, but also makes the investment to grow.

There is a unique trend that you can now observe in Google or any other search engines. The intensity of searching for options to invest in tax savings instrument increases exponential now. This will continue for the next three months also. One of the reasons for this is that most of the salaried employees having taxable income start receiving calls from their HR department to submit copies of their tax-deductible investments. This acts as a wake-up call for those who have not yet invested in tax saving instruments. This leads to an increase in search for options to invest in order to save tax.

Section 80C of Income Tax Act remains the most widely used section for claiming income tax deduction. The section allows a deduction of Rs.1.5 lakh to all categories of taxpayers, irrespective of the source of their income. Among various tax saving instruments available under this section such as life insurance premiums, NSC, PPF, etc., one option that clearly stands out is equity linked saving scheme (ELSS). While many of you still stick to traditional investment products such as PPF, life insurance premiums, etc., the smart investors opt to invest their money in ELSS. And it is no coincidence that even the search trend of tax saving instruments coincides with the rise in search for investment in ELSS.

The reason for ELSS being the first choice of smart investors is because it scores over other options in a big way and give best of both worlds, namely, tax savings and returns on investment. First and foremost reason being the huge outperformance in terms of returns. In the last one year, the average returns generated by 40 ELSS is 41per cent.

Nevertheless, one year of performance might not be a correct reflection of the long-term performance of this segment. Hence, we took annualised return of five years and this too was standing tall amongst all other options. The return was 18.75 per cent on an annual basis (See Table on next page). The product that comes closest to ELSS in terms of returns under Section 80C of the IT Act is Unit Linked Insurance Plan (ULIP), which has, on an average, generated return of around 10-12 per cent during the same period. However, the returns are not comparable as both products are different and serve different needs. The current circumstances makes ELSS more appealing as the government has recently reduced interest rates on most of the small savings schemes by 20 bps, including Public Provident Fund (PPF), National Savings Certificate (NSC) and KisanVikas Patra, for the January-March quarter.

Review of our 2015 recommendations 

We outperformed all other benchmark again! As ELSS has a lock-in period of three years, we review the performance of our recommendations given three years ago. We recommended five ELSS schemes in our issue dated 25 Jan 2015 issue number 3, volume 30 under ‘5 Best Equity Linked Savings Schemes’. The average return generated by our recommendation is 41 per cent. This return is after adding all the dividends distributed by the funds during the period. If we annualised the returns, it works out to 18.75 per cent. Against this, the total return generated by ELSS category in the same period is 14.94 per cent. Even if we compare the returns against leading equity indices, such as Sensex (23 per cent), the return generated by our recommendation easily surpasses the return generated by the indices during the same period. We normally recommend dividend options in ELSS as it will give you frequent cashflow and also help you to book profit. The best part of our recommendations is that all the schemes have individually beaten both the fund category as well as leading indices.

The better returns generated by ELSS can be understood with an example: If you had invested Rs.1 lakh each in the NSC certificates and in an ELSS scheme five years back, your money would have grown to Rs.1,47,614 @ 8.1 per cent annualized rate in NSC. In the case of ELSS, your money would have multiplied to Rs.2,36,139 at an annualised at rate of 18.75 per cent during the same period. The return generated by ELSS is 1.6 times more than the return generated by the NSC.

Besides better returns, there are other benefits offered by the ELSS.

1) ELSS is categorised under the EEE (exempt- exempt- exempt) tax regime, which means the investment amount, the dividends earned and matured or redeemed amount after the lock-in period are all tax free.

2) Compared to the other tax saving instruments available under section 80C, ELSS has a shortest lock-in period of just three years.

3) The dividend in the hands of investors is tax free. Hence, if you opt for the dividend option, you will keep on receiving dividends even during the lock-in period. In the case of other investments, interest is mostly taxable and is received on maturity.  –

4) In ELSS, there is neither any limit on amount of investment, nor any specified age limit. You can start investing in ELSS with as low as Rs.500 per month. However, the benefit of tax deduction is limited upto Rs.1.5lakh .

5) One of the best part of investing in ELSS is that after three years it becomes self-sustaining. What this means is that if you are facing any cash crunch, you can redeem anytime the investment made in ELSS after the lock-in period of three years and then you can re-invest the amount. Hence, this makes it self sustaining after three years and more liquid compared to other products.

In addition to this, if you are new investor and taking exposure to equity market through mutual fund when the markets are trading at all-time highs, a long-term investment horizon will help you to earn better returns. ELSS is a perfect match for you as it will help you to remain disciplined.

The benefits offered by ELSS are being realised by the taxpayers and this is reflected in the rise in the amount being invested in ELSS. It has increased from Rs.8343 crore in FY15 to Rs.14624 crore in FY17. For FY18, the amount invested up to November has already surpassed last financial year's total investment, and the major part of the investment is yet to be made, which is usually made in the last four months of the financial year.

Following the trend of search for equity saving instruments, majority of investment in ELSS is also made in the last four months of any financial year. In the last three fiscals ending FY17, we have witnessed that more than 50 per cent of the investments are made during the months of December — March, and out this, half of the investments are made in March. This despite knowing the fact that investment in haste may not give optimum returns.

Nevertheless, if you are a regular reader of our magazine, you would have observed that, as an yearly exercise, we have come up with seven funds that will not only help you save on tax but also increase your wealth over the years to come.

Breaking from the traditional way of recommending schemes based on historical returns, this time we will be using our inhouse developed proprietary method of analysing funds based on forward looking parameters. Hence, these funds may or may not have been historically on the top quartile of performance, but these are likely to beat the category returns going forward. All the funds are equally good for investment, however, for proper diversification, you can go for any three funds which suit your risk profile. We suggest you go for the direct scheme with dividend option at the current juncture as this will help you to book profit regularly and also provide you some liquidity. Nevertheless, if your investment horizon is more than five years, you can go for the growth option. Besides, investment in ELSS or tax saving instruments should be considered in the context of overall financial planning.

Sanjay Chawla, Chief Investment Officer, Baroda Pioneer AMC "We Expect Sector Rotation To Drive Stock Returns In CY2018"

What reasons do you attribute to your ELSS fund doing well? 

Baroda Pioneer ELSS '96 has done well because both our sector and stock calls have worked well for us. We have been overweight on NBFC and consumption theme, while being underweight on some of the sectors such as telecom, pharma and IT.

We have actively managed the fund as a multi-cap fund by optimally varying market cap of the fund to generate the alpha. Finally, we have been able to effectively mitigate risks by not taking concentrated bets on illiquid mid-cap stocks. Our endeavour has always been to provide the investors with a good risk-adjusted return.

Please elaborate your stock selection strategy? 

Our investment philosophy is to invest in companies which have good growth potential and are trading at reasonable valuations. The quality of the management is a qualifying filter to get companies in our investment radar. Visibility for growth should be for a reasonable period. The most important factor while evaluating the same is to see the sustainability of growth. Some of the questions that we keep asking is "What is the moat that the business has"? What is the competitive advantage that the company has? We like businesses which have sustainable competitive advantage, which gives the company good pricing power to give us predictable earnings visibility.

Which sectors are you bullish on currently and why are they going to perform well in year 2018? 

For calendar year 2018, we expect sector rotation to drive stock returns. Sectors which are going to benefit from demonetization, GST and government spending are likely to benefit. Rural spending is also likely to pick up. The government spending in certain infrastructure project may lead to higher order booking for construction companies. Industrials are also likely to pick up gradually in the latter half of the year.

After 2017 being a great year for equity investors, how do you see equity returns for 2018? 

Given the base effect of demonetisation and GST, the earnings are likely to recover in 2018. This may provide some comfort for the relatively higher valuations. While global easy liquidity may taper off since most of the economies are improving. Domestic liquidity in mutual funds continues to be strong. During the year 2017, we have seen Indian mutual fund investors taking a mature call towards investing in equities. Based on the asset allocation, we do expect the same to continue in 2018. This, to an extent, may provide support to the equity markets.

Atul Kumar, Head-Equity Funds, Quantum Asset Management Company 

"Earnings Growth May Be A Good Trigger For The Economy"

2017 being a superb year for the equity markets with leading indices giving 30 per cent returns, how do you see the returns in 2018? 

What we have been observing is that while the markets are going up, recovery of earnings is still a problem. Earnings have not picked up in the expected way. Though there is a kind of anticipation that earnings are going to pick up very soon, and there are already earlier signs of recovery. However, from the valuation perspective, markets are not that favourable. Even if earnings grow, a lot of it is already priced in. Market in a bull frenzy can go higher, but if we look from a valuation perspective, we see it a bit stressed. In terms of returns, it will not be a great year and that is what overall valuations suggest.

Considering that markets are currently trading at all-time highs, and people investing in ELSS have a three-year time horizon for their investment, where do you see the risk-reward ratio? 

If someone is investing in ELSS with a lock-in period of three years, it is still a good time to invest because what we are seeing is that the real GDP growth is in the range of 6-6.5 per cent, and accordingly, the companies' earnings can grow at nominal rate of around 14 per cent. From that perspective, one can think of investing. From a shorter-term perspective, valuation looks stressed. Had there been some market corrections, it would have made us more bullish. But given the situation right now, we can say that, from a three-year perspective, it is still favourable.

Please elaborate your stock selection strategy? 

We use bottom-up stock selection strategy and are totally sector-agnostic. We look at stocks that trade a million dollar a day and do not look at anything below. Liquid assets can be bought and sold with little impact cost. Moreover, it is harder to manipulate these types of stocks. Hence, the NAV you get is real NAV. We have our own proprietary database from which we pick and choose stocks. We keep on meeting the management of companies that we cover on a regular basis. We are also concerned with the corporate governance of the companies whose shares we are buying. In case any company in the past has not been fair to minority shareholders, we do not buy shares of such companies. And, finally, valuation has to make sense. We enter stocks only if we find valuations are favourable. We are also very disciplined when it comes to selling a stock. We sell any stock that crosses our sell limit. All these things should be looked at within the overall context of the ELSS scheme, and the cash level should not exceed 20 per cent at any point in time.

Which sectors are you bullish on currently and why they are going to perform in 2018? 

We invest across sectors, wherever we find an opportunity. We do not follow top-down approach or sectoral approach. When we look at ideas, we do not look which sector it is from.

What will be the main triggers for equity market in 2018? 

It'll be earnings growth, which is yet not come. The market had expectation since 2014 that earnings will grow, but the growth has evaded till now. Just before demonetisation, there were signs of growth, but after demonetisation those signs and hopes got killed. However, after three-and-half years of new government, we see that both domestic as well as international demand increasing simultaneously. Globally, we will probably see best growth post-financial crisis. From that perspective, earnings growth may be a good trigger for the economy. One of the triggers will be the rise in crude oil prices as well as other commodity prices that have been going up. Moreover, we are also witnessing some signs of normalisation in terms of interest rates, and they are going up in many economies. In addition to this, we are seeing some economies cutting stimulus that they were offering for some time. These factors can also turn negative.

Neelesh Surana, CIO-Equity, Mirae Asset

 "Market Returns To Track Earnings Growth, Which Is Expected To Revive"

What is the reason you attribute behind the fund doing well? 

Our investment philosophy is centered on participating in quality businesses up to a reasonable price, and holding the same over an extended period. From portfolio construct perspective, the approach is to have diversification across sectors and stocks for an optimal risk-adjusted return.

Please elaborate your stock selection strategy? 

Stock selection process has three aspects: Business selection, Management analysis, and valuation. We look of quality businesses with decent growth prospects as well as return on equity. These two parameters are important initial filters. Second filter is with respect to management analysis, which is qualitative and wherein we evaluate thought-leadership, past track record and corporate governance. The last factor is related to valuation - Value has to be more than the market price so that there is enough ‘margin of safety'.

Which sectors you are bullish on currently and why they are going to perform in year 2018? 

We remain positive on consumption oriented businesses, subject to valuation filters. In addition, we are positive on select businesses positively impacted by strength in global economy. Many consumer oriented strong franchise have strong tailwinds of growth over next few decades driven by favourable demographics, rising income levels, urbanisation, more women in workforce, increase in awareness owing to technology, etc.

After 2017 being a great year for equity investors, how do you see equity returns for 2018? 

India remains one of the few regions with structural long term growth drivers, and expects market returns to track earnings growth which is expected to revive. These coupled with concerted efforts by government to revive the investment cycle, benefits of decent monsoons and pay hike, will help revive the growth in corporate earnings, which has been muted for few years. Going forward in 2018 and beyond, we would expect NAV returns (not necessarily market returns) in the range of 15-17 per cent over the long-term.