Short on time? Listen to a brief overview of this week’s review.
- A tax-saving equity fund, under Section 80 C of the Income Tax Act
- Diversified in nature, investing across market capitalisations
- Strong performance in beating peers and the market
- Buy-and-hold approach with lower portfolio churn
- Investors with a moderate to high risk appetite and a 4-5 year horizon
Traditional go-to options to save on taxes are bank or post office deposits, public provident fund, or national savings certificates. But with interest rates trending down, bank deposits are giving about 6.25% now, post office deposits are at 7.6%, the NSC is at 7.8%, PPF is at 7.9%. Further, with quarterly revisions, rates may head further south if the current interest rate cycle persists. With interest income taxed, net return on these instruments drops further. Tax-saving mutual funds or ELSS (equity linked savings schemes) offer the best route to save taxes plus earn superior returns. On an average, ELSS funds delivered 12.9% and 17.7% annually in the past three and five years. Long-term capital gains are tax-exempt.
However, with over 40 ELSS schemes available, care must be taken to select funds with strong performance records. Among these is Invesco India Tax Plan, for long a part of our Select list. In the 3-year and 5-year periods, it has beaten the Nifty 500 index by 2-5 percentage points. An annual investment of Rs 50,000 in the fund since 2007 would have delivered Rs 13.8 lakh by end of March 2017, against the Rs 8.1 lakh of a similar investment in PPF.
Nature and suitability
Invesco India Tax Plan (Invesco Tax) is a go-anywhere fund, investing across large-caps and mid-cap stocks. The share of large-cap stocks in the portfolio has been rising in the past few months to 78% now. However, the fund has taken a significant mid-cap exposure of around 30% in earlier months and years. It also holds a concentrated portfolio. Therefore, the fund requires a moderate to high risk-appetite. Conservative investors can stick to Franklin India Taxshield, which retains a far higher large-cap share. While the lock-in for ELSS funds is three years, a longer holding period is required to realise the full benefits of Invesco Tax Plan’s strategy and the equity markets.
Invesco Tax Plan’s benchmark is the BSE 100 index. While the fund does have a large-cap tilt, the higher mid-cap allocation makes the Nifty 200 or even the Nifty 500 a better performance gauge. Against this broad-market Nifty 500 index, the fund has always done better based on rolling 3-year returns since the fund’s inception in 2006. The average extent of this outperformance is a good 7 percentage points.
Compared to other ELSS funds too, Invesco Tax holds its own. It is able to beat the category average all the time when rolling 3-year returns over the past 5 years. It holds its risk-adjusted return above the average as well, close to top peers such as Franklin India Taxshield. In correcting markets, the fund has restricted the extent of loss much better than peers. In the 2011 correction, for example, the fund’s 22% loss was much lower than the 28-30% loss of both the BSE 100 and the Nifty 500 index.
However, the fund’s diligence in moving out of stocks that have run up and its tendency to sometimes pick stocks that are facing near-term headwinds finds it underperforming peers or the market in shorter timeframes. This is what has been happening of late. The fund holds stocks such as Bharti Airtel, Sun Pharma, MCX, and Thermax, entering some of these in the past year or raising stakes in them. It exited several outperformers, such as energy stocks Gujarat State Petronet, HPCL, and MRPL, Aditya Birla Nuvo, and Bharat Forge.
Invesco Tax’s large-cap allocation has been well above average. In the current market climate where mid-caps have not corrected the way large-caps have, the higher allocation will weigh on returns. This, together with profit booking and entering new stocks pulled down near term performance compared to current chart-toppers. Even stalwarts such as Franklin India Taxshield have been underperforming the category of late owing to their conservative stance. Given the market today, a cautious approach offers far more comfort.
Portfolio and strategy
Invesco Tax’s focus on company balance sheets, long-term growth, and valuations sees it often pick off-beat stocks well before they come into their own. Examples include VIP Industries, Supreme Industries, Balrampur Chini Mills, and Grindwell Norton. Some of these still form a part of the portfolio. It holds a concentrated portfolio, with the top ten stocks often making up 40-50% of the portfolio.
Invesco Tax does not stick to benchmark sector allocations, going significantly overweight or underweight to the benchmark weights. Its portfolio currently is balanced between reasonably-valued consumer plays and cyclical ones. Among its preferred picks are automobiles and smaller niche companies that are rural and consumer-themed such as Coromandel International, Wonderla Holidays, and Aditya Birla Fashion. On the cyclical side, the fund holds behemoth Larsen & Toubro as well as other engineering, power, and energy stocks.
Vinay Paharia and Taher Badshah are the fund’s managers. It has an AUM of Rs 443 crore. The SIP route to investing is preferable, though each instalment will be locked for 3 years.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.
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