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The Top-Rated Tax-Savings Funds Based On Risk Appetite

Top-rated funds as per scoring models available on Bloomberg based on various risk profiles of funds and investors.

Why Balanced Funds Are Good Choice For First-Time Investors Find Out On Mutual Fund Show
Why Balanced Funds Are Good Choice For First-Time Investors Find Out On Mutual Fund Show

There are a number of investment avenues through which the government allows an individual to save taxes under various sections of the Income Tax Act of 1961. The most commonly used by salaried individuals are investments made under Section 80C of the Act, offering a maximum deduction of Rs 1.5 lakh per year for any individual.

These options include:

  • Five-year fixed deposits with banks and post office.
  • Public Provident Fund.
  • Employee Provident Fund.
  • Premium paid for life insurance plans.
  • Equity-linked savings scheme or equity mutual funds with a three-year lock-in.

Here are the top-rated funds, as per scoring models available on Bloomberg, based on various risk profiles of funds and investors.

The Risk Averse

This model evaluates funds for their risk-averse behaviour and suitable for investors who are not that comfortable with taking risks. It assigns more weight to a low one-year weekly annualised standard deviation—a measure of volatility—and less weight to a high total return and information ratio (the proportion of portfolio that outperforms the bechmark).

Funds earn higher scores under this model when:

  • The one-year weekly annualised standard deviation is low.
  • The one-year total return is high.
  • The one-year weekly information ratio is high.
The Top-Rated Tax-Savings Funds Based On Risk Appetite

The Risk Taker

This model evaluates funds for their risk-taking behavior, assigning more weight to a high yearly total return, making these suitable for investors with high risk appetite.

Funds earn higher scores under this model when:

  • The one-year weekly annualised standard deviation is high.
  • The one-year total return is high.
  • The one-year weekly information ratio is high.
The Top-Rated Tax-Savings Funds Based On Risk Appetite

The Balanced

This model evaluates funds for their risk-taking behavior versus returns using the Sharpe Ratio and Jensen Alpha—that measure performance over risk-free return— and semivariance, another gauge for volatility.

Funds earn higher scores under this model when:

  • The three-year monthly Sharpe Ratio* is high.
  • The three-year monthly Jensen Alpha* is high.
  • The three-year monthly annualised semi-variance is low.
The Top-Rated Tax-Savings Funds Based On Risk Appetite

*Bloomberg Definitions:

Jenson Alpha: A market risk-balanced measure of performance, based on the Capital Asset Pricing Model. Calculated as the difference between security average return vs risk-free rate and beta times benchmark excess return.

Sharpe Ratio: A risk-adjusted measure that calculates excess performance with respect to the risk free rate (the three-month yield linked to the currency), per unit of volatility over the specified time frame.