Tax Saving opportunity in Equity Linked Saving Schemes Analyst Rachana Makhija rachana.makhija@destimoney.com Destimoney Research
Why Invest in Tax-Saving Mutual Fund (ELSS) Equity linked savings schemes (ELSS) are equity-oriented mutual fund schemes with an added feature of tax saving under Section 80C of Income Tax Act, 1951. Investments up to 1.5 Lakh in ELSS funds are eligible for deduction from taxable income under section 80C of Income Tax Act,1951.and the Dividends are also tax free in the hands of investor ELSS Funds primarily invests 80%-100% of the AUM in high return assets like equity, since the main objective is capital appreciation. ELSS offers the shortest lock-in period of 3 years amongst all the tax saving instruments ELSS is not only attractive option to save tax but also helps to create wealth over the long term. ELSS as a category has outperformed the CNX 500 Index across 3, 5 and 10 years horizon by generating compounded average return of 28%,14% and 17% respectively. Currently, there are 54 ELSS schemes in the market, out of which 38 are open ended and 16 are close ended schemes. We suggest our investors to invest in below Open ended ELSS funds Axis Long Term Equity Fund Franklin India TaxShield HDFC Tax Saver Reliance Tax Saver Fund 2
ELSS have shortest lock-in period amongst tax-saving instruments under section 80-C In Union Budget 2014-15, amount exempt for investing in tax saving instruments increased to Rs 1.5 Lakhs Per Annum. Instruments ELSS PPF NSC Tax Saving Bank FD Traditional Insurance ULIPS Lock in 3 years 15 Years 6 Years 5 Years 5 Years 5 years Risk Market Linked Fixed Return Fixed Return Fixed Return Return Market Linked 8.7% p.a 8.5% pa 8.5%-8.8%pa Tax on Dividends are Tax on Interest Tax on Interest Tax Free Interest/Exit Tax free earned earned Source: Destimoney Research Guaranteed Sum Insured Guaranteed Sum Insured Maturity Proceeds are Tax Free Market Linked Market Linked Maturity Proceeds are Tax Free 3
ELSS generate superior returns over the long term Value of `10,000 invested in 2001 in different Tax-saving products (Pre-Tax) Year PPF (`)@ NSC (`)@ Tax Saving Bank FD( `)* ELSS (`)^ 2000-01 10,000 10,000 10,000 2001-02 10,950 10,950 12,888 2002-03 11,936 11,936 11,946 2003-04 12,890 12,890 25,508 2004-05 13,922 13,922 41,846 2005-06 15,035 15,035 10,000 79,963 2006-07 16,238 16,238 10,800 79,700 2007-08 17,537 17,537 11,691 94,348 2008-09 18,940 18,940 12,685 60,902 2009-10 20,455 20,455 13,763 128,186 2010-11 22,174 22,092 14,933 143,402 2011-12 24,036 23,992 16,239 137,379 2012-13 26,103 26,103 17,660 138,382 2013-14 28,322 28,374 19,161 169,130 Source: Destimoney Research ^Return of HDFC Tax saver Fund are used to calculate the returns from ELSS @ Year end balances have been arrived at by adding interest at the rates notified by the competent authorities from time to time. *Tax Saving Fixed Deposit scheme was started in 2006 4
Recommended ELSS Funds Axis Long Term Equity Fund Fund Attributes Sector Sector Allocation Investment Style Growth Blend Value Launch Date 29 th December 2009 Fund Manager Jinesh Gopani Benchmark S&P BSE 200 AUM (Rs crore) 3,198 Total No of Holdings 40 Expense Ratio(%) 2.33 Banks 19.3 Finance 13.5 Software 11.3 Pharma 8.3 Consumer Durables 7.5 Large Medium Small Capitalisation PE Ratio 37.96 PB Value 8.04 Standard Deviation 0.90 Top 5 Investments Fund Allocation Beta 0.78 Company/ Security Sharpe 0.12 Jensons Alpha 0.12 Lock in period 3 years Performance (08 January 2015) HDFC Bank Ltd 8.6 Kotak Mahindra Bank Ltd 6.8 L&T Ltd 5.8 TCS Ltd 5.4 HDFC Ltd 4.4 Equity 97.8% Cash & Equivalent 2.2% 6 months 1 year 3 year 5 year 22.4 65.2 36.2 23.3 Returns less than 1 yr are absolute & greater than 1 yr are CAGR Data for November 2014 Invests across different market cap range using fair value based investment approach. Fund manager has maintained his portfolio with large cap bias stocks which has helped the fund to outperform consistently over its peers. The fund manager adopts strategies to create wealth in the long term 5
Recommended ELSS Funds Franklin India Tax Shield Fund Fund Attributes Sector Sector Allocation Investment Style Growth Blend Value Launch Date 10 th April 1999 Fund Manager Anand Radhakrishnan Benchmark CNX 500 Index AUM (Rs crore) 1,589 Total No of Holdings 56 Expense Ratio(%) 2.36 Banks 28.3 Industrial Products 8.2 Mining 8.1 Auto Ancillaries 7.7 Auto 5.2 Large Medium Small Capitalisation PE Ratio 29.58 PB Value 5.69 Standard Deviation 0.90 Top 5 Investments Fund Allocation Beta 0.81 Company/ Security Sharpe 0.07 Jensons Alpha 0.08 Lock in period 3 years Performance (08 January 2015) ICICI Bank Ltd 5.8 HDFC Bank Ltd 5.4 Infosys Ltd 5.1 Cash & Equivalent 4.4 IndusInd Bank Ltd 4.1 Equity 97.3% Cash & Equivalent 2.7% 6 months 1 year 3 year 5 year 22.4 58.2 28.2 17.2 Returns less than 1 yr are absolute & greater than 1 yr are CAGR Data for December 2014 The fund manager uses bottom up approach and invests in companies with strong track record, strong earnings growth, robust business models, sustainable competitive strengths and high corporate governance standards. The fund has a large cap bias and has remained overweight in sectors like Banks, Auto and Pharma over the years. 6
Recommended ELSS Funds HDFC Tax Saver Fund Fund Attributes Sector Sector Allocation Investment Style Growth Blend Value Launch Date 31 st March 1996 Fund Manager Vinay Kulkarni Benchmark CNX 500 Index AUM (Rs crore) 5,145 Total No of Holdings 50 Expense Ratio(%) 2.13 Banks 28.1 Software 12.2 Auto 8.2 Pharma 5.8 Petroleum Products 5.5 Large Medium Small Capitalisation PE Ratio 24.04 PB Value 3.92 Standard Deviation 1.05 Top 5 Investments Fund Allocation Beta 0.93 Company/ Security Sharpe 0.07 Jensons Alpha 0.09 Lock in period 3 years Performance (08 January 2015) SBI Ltd 9.9 ICICI Bank Ltd 7.2 Infosys Ltd 6.0 BPCL Ltd 4.7 Tata Motors DVR 4.4 Equity 97.3% Cash & Equivalent 2.7% 6 months 1 year 3 year 5 year 10.6 57.0 26.0 14.6 Returns less than 1 yr are absolute & greater than 1 yr are CAGR Data for November 2014 This fund invests in stocks with large cap bias and in growth companies. It is more conservatively managed as compared to its peers. The fund manager selects the companies to invest, wherein the companies have high growth rate, enjoy distinct advantages and have superior financial strengths. 7
Recommended ELSS Funds Reliance Tax Saver Fund Fund Attributes Sector Sector Allocation Investment Style Growth Blend Value Launch Date 21 st September 2005 Fund Manager Ashwani Kumar Benchmark S&P BSE 100 AUM (Rs crore) 3,618 Total No of Holdings 51 Expense Ratio(%) 2.13 Capital Goods 18.6 Auto 12.3 Industrial Products 9.6 Banks 8.9 Metals 8.7 Large Medium Small Capitalisation PE Ratio 37.83 PB Value 6.42 Standard Deviation 1.04 Top 5 Investments Fund Allocation Beta 0.81 Company/ Security Sharpe 0.09 Jensons Alpha 0.11 Lock in period 3 years Performance (08 January 2015) TVS Motor Company 9.7 SBI Ltd 6.4 Tata Steel Ltd 5.9 Wipro Ltd 4.4 Honeywell Automation Ltd 5.6 Equity 99.0% Cash & Equivalent 1.0% 6 months 1 year 3 year 5 year 21.2 84.3 38.9 19.9 Returns less than 1 yr are absolute & greater than 1 yr are CAGR Data for November 2014 The fund is positioned as an aggressive large cap - Mid Cap oriented fund. It aims to have a mix of minimum 50% exposure to top 100 companies by market capitalization and high quality mid cap companies. Due to its mid-cap allocation, this fund is aggressive fund amongst its peers. A small percentage of portfolio is also invested in contrarian calls. 8
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