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#BQMutualFundShow: Five Tax-Saving ELSS Funds You Can Invest In

ELSS helps an investor to save tax under Section 80C with a three year lock-in period and also gives good returns. 

Filaments glow inside a LED light bulbs. (Photographer: Jasper Juinen/Bloomberg)
Filaments glow inside a LED light bulbs. (Photographer: Jasper Juinen/Bloomberg)

It’s that time of the year when everybody is scampering to save tax and equity-linked savings scheme is a popular option.

It’s an open-ended mutual fund scheme which helps an investor save tax under Section 80C of the Indian Income Tax Act with a three-year lock-in period. Deductions under this section are fully exempt from tax up to an upper limit of Rs 1.5 lakh a year. The instrument is comparable with other financial allocations in this section, such as Employees’ Provident Fund contribution, Public Provident Fund investment, and life insurance premium.

An ELSS however is more than just a tax-saving investment.

ELSS is an equity mutual fund that is structured like any other, with the objective to generate consistent long-term returns by investing a majority of its corpus in equity shares.

On BloombergQuint’s weekly series, The Mutual Fund Show, Morningstar’s Kaustubh Belapurkar listed the investment research firm’s top picks among ELSS funds. Morningstar has either a silver or nronze rating on five of the nine schemes under its coverage. Among other things, the fund manager and his/her style of management is given importance while assigning rating to a fund.

Here’s a snapshot of the five funds discussed:

AXIS LONG TERM EQUITY FUND
Morningstar Rating: SILVER
Fund manager looks for high growth stocks and pays premium

FRANKLIN TAXSHIELD FUND
Morningstar Rating: BRONZE
Fund manager looks for growth at a reasonable price (GARP) stocks

HDFC TAXSAVER
Morningstar Rating: SILVER
Fund manager follows buy and hold strategy

L&T TAXSAVER
Morningstar Rating: BRONZE
Fund manager has a knack of identifying stocks ahead of the Street

RELIANCE TAX SAVER
Morningstar Rating: BRONZE
Fund manager looks for growth companies at discount to intrinsic value

Watch the full interview here.

Here are edited excerpts from the interview.

People say, if they have to invest in a mutual fund, they would choose a regular mutual fund. For 80 (C) they would choose other instruments like PPF etc. The whole myth about ELSS giving lesser returns, why is that the case?

People have traditionally been used to other instruments. Mutual funds have become popular now in the last three to five years. But people have been buying PPF, insurance policies for decades. That mind change has not come across when it comes to ELSS funds. People have seen returns in other large, small, mid cap funds.

ELSS is slowly gaining traction. But there is still a long way to go. The other thing that happens is people do last minute planning, and maybe they are not too sure of what markets will run up and they want to look at safer options rather than equity funds. It is March end and people are starting to put in money right now. It is investor psyche, but is definitely changing now.

The beauty of ELSS is that you are making equity investments with a three-year lock in. I wouldn’t recommend people to take out money after three years, but if you do need that liquidity at some point, it is much better than seven to ten year lock in vis-à-vis other instruments that you can invest under the 80 (C) and other options. It is a compelling opportunity when it come to equity ELSS funds.

In effect, if you want to park money in ELSS, you only park money if you can afford to forget it for three years.

Yes. It instills some discipline in investors because you are not looking if markets have corrected so you can get out. I look at it as a disciplining factor which is an additional positive of ELSS vis-à-vis any traditional equity schemes.

Data has shown that investors tend to forget about these funds because they don’t track them that often. More often than not, they have made a tonne of money by just staying invested for seven to ten years. They forget about it and see the value and they are extremely happy with the schemes that they have got into.

For people whose salaries are such that their EPF contribution takes care of the limit, ELSS is obviously not a good idea. Rather investing in mutual funds is a better option. Is that a fair assumption?

Largely yes, because you don’t have that lock in. If you are worried about your 80 (C) requirements, then that is good idea. But there is one thing that people don’t look into. We like ELSS because managers know that investors will be locked in for three years, he has a lot more visibility on flows. The AUM that he is managing, and he can get to high conviction ideas without having to maintain too much liquidity. He has got a view on liquidity and he knows what money will possibly go out, and when.

Investors have matured now. We are not seeing investors come and redeem in a couple of years. But it is a bit of leg up in that sense, because if I am the manager and say that you have a certain amount of money which is not going to be pulled off for next three years, then I can get into some high conviction ideas and just buy, hold and not worry about interim fluctuations of the markets. So that is additional incentive of ELSS where they could get the additional alpha through pure buy and hold, high conviction buys with the managers.

Do you make use of ELSS?

Yes, for personal investments.

What’s the methodology that you are using when you are rating these schemes?

This is a fairly intensive human resource process where a team of analysts tracks managers and their strategies. So, we spend a lot of time doing research and understanding what the strategy is.

We have interviews with managers to understand the team, the process they are following in building the portfolio, and quality aspects like the pedigree of the asset manager and performance. But it is not just about point-to-point performance, but also about understanding performance attributions – how broad based is the returns delivery, is it concentrated in a couple of stocks and sectors or is it broad based across sectors and stocks?

Because the former is more repeatable performance from our perspective. The last one is more of an expense ratio pillar which is a hygiene factor, that we don’t want very expensive funds. It's not very important from an equity side right now, but from fixed income side it is important.

From ELSS perspective, probably it is not much. Given those constraints, we cover a certain set of funds. Depending on where we see better managers or there are larger strategies, where there are institutional investors, that’s where we put qualitative ratings out. We have ratings on nine ELSS schemes right now and we will talk about some high rated strategies.

Has there been a lot of churn in ratings for these funds or at least the top five or six? Do the scheme performance and thereby its rating, as per your parameters, change considerably year after year or are there names which are constant?

The simpler answer is no. We are firm believers of long-term investing. To be fair to investors if they are looking at our ratings and coming in, and we very frequently change it, that could be an issue. Today it may be our best rated funds and he invests in it based on that, and after three months it has been downgraded a couple of notches, that’s not fair to investors.

Because we are looking at a deep dive – understanding the manager’s philosophy, his process, the strengths of the team and how they construct portfolios – we don’t think the merits are changing that frequently. We will keep reviewing his portfolio unless and until there are dramatic changes in strategy.

For instance, if he says he is a value buy and hold manager and suddenly we see high momentum stocks coming in, then we raise a red flag and say let’s understand what is happening. Are you changing strategy, or you are not finding value? We will be conscious of it. But otherwise, once you have assessed a manger, we believe that it is for the long term and that’s what investors also appreciate.

What is Axis Long Term Equity Fund scheme about, and why do you like it?

Even within the ELSS category, there is a fair bit of style or market capitalisation bias that you can have with managers. That’s important for investors to understand. You might be getting into an ELSS, but because it is such a diverse category, you need to understand the underlying portfolio construct because a mid-cap based ELSS may not be suitable for all.

Most managers typically tend to drift towards large-cap holding. There are managers who take mid-cap holdings too. So, you need to do that level of checks and understand if this strategy is suitable for me. Jinesh Gopani who is the CIO of equities, and is managing this strategy for seven years now, is a pure growth manager.

His philosophy is that I will look at supernormal growth, high growing companies, and I understand that they are going to come at a premium, but I won’t mind paying. If you look at his overall portfolio, stocks and PE tend to be higher than peers. So, you will see a concentrated bunch of stocks, he typically runs a 40-50 stock portfolio, and it would be a sort of high growth portfolio. He predominantly runs a large-cap strategy.

So, you will see 70 odd percent in large-cap stocks. In that sense, it is less risky and less volatile than a guy who will earn 40-50 percent in a mid-cap strategy. These funds are doing well. It did have some blips in 2016-17 but it is now coming back. It is one of those consistent performers.

For Franklin Tax Shield Fund you have given a bronze rating. Why do you like the scheme and why the bronze rating?

There is lot of conviction on Franklin Templeton as a fund house. This strategy was being managed by Anand Radhakrishnan a couple of years ago, till they hired Laxmikant Reddy. He didn’t come really from a mutual fund manager experience. He came from ICIC Life. So he is more from the insurance side. He has worked in the market for very long time.

Templeton has an outstanding team of analysts to deliver stock ideas to manager. That is a starting point for building a portfolio. Again, skewed towards large caps, it is safer in that sense, and it is more diversified portfolio. So, you will see he will buy across sectors and stocks. He doesn’t want to go crazy in trying to get top returns all the time, but he wants consistency. That’s the philosophy in Templeton. They are trying to protect capital and be less volatile than the market.

HDFC Tax Saver is a silver rated fund. Why do you like the fund and what are the characteristics?

HDFC is a very strong fund house in terms of research. Prashant Jain has been at the helm of affairs at HDFC, an outstanding stock picker. Vinay Kulkarni, who is managing this fund, has been with the team for a long time. Given the research that he has been delivered through the analyst team, it is a fairly convincing portfolio that he has built.

I must say that the fund has suffered like the other HDFC funds in 2015, where the performance took a major hit because they were early in the cycle. The cap goods companies, and the likes of SBI...they were probably the only people standing at that point of time on that counter, and it hurt them. But they held onto their conviction as they knew that things will turn around. Lot of managers piled on to SBI in the coming years and they were still adding to that counter when you see the correction.

It is a team of great managers who are experienced, which is delivering on the strategy. When I talk about the way the strategy is run, this used to have an element of mid cap but now he is flexible. But right now, given the valuation, he is more comfortable in large caps. He is a manager who will switch between large and mid cap, more like a flexicap fund manager. Right now he is more in large cap given valuations. This fund will have a slightly higher beta because the portfolio is geared towards economic revival. If you look at the sectoral exposure right now, financials, utilities are a large part of his portfolio.

So, you will see a fair bit of market data. It could be volatile in the short term, but we think that if you are there for the long term then this is a nice fund to invest into.

Why did you like L&T Tax Saver?

L&T as a fund house has come up the curve. To give you a background, Fidelity Asset’s Soumendra Nath Lahiri who is the CIO, took that mantle up. People were worried that Fidelity had such great managers and strategies, would L&T would take that over nicely. I think they have done that.

Lahiri and his team, while they are still a smaller team compared to the sStreet, they have done a phenomenal job. The one thing that we have noticed is, that they are among the few people that take bets, they invested 2-3 years before the Street recognised certain stocks. I don’t know how they do it, but I think they have a superb research analyst. This strategy is more of a multi-cap strategy which gets 50-60 percent in large caps and the remaining in small and mid caps. He also does value buying in his portfolio.

For Reliance Tax Saver, should people view it differently now as the guy at the helm is different?

Manish is a great manager who has spend so many years atICICI. But Ashwini who manages strategies has been in Reliance for a very long time. So, we have that comfort and we don’t see a change in terms of the way the funds are managed.

This fund is unique in that it is a more concentrated strategy. He tend to look at 3-4 sectoral exposures in his portfolio and the rest of the sectors may not exist. So, it is going to be sector heavy. If you look at performance, it is a market beater strategy. So it will be more aggressive. It will take on more small and mid-cap exposure.

So, this might be for some risk-loving investors given that it will go up in good markets, but it can fall. We have seen in 2018 that the fund has fallen more than indices at that point. So, it will be volatile fund but because we have seen that kind of strategy being run by Ashwini for a very long time, we have fair bit of comfort that he should do a good job going forward too.