If you are looking to save taxes under Section 80C of the Income Tax Act and are also looking for high-returning options, then the ELSS fund, Reliance Tax Saver, may be right up your radar. With returns of 20.9% compounded annually in the last 3 years, the fund beat its category average by 6 percentage points and its benchmark S&P BSE 100 by about 9 percentage points.
Investment in the fund enjoys tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. In the recent July 2014 Budget, investments allowed as deduction under Section 80C were increased to Rs 1.5 lakh from Rs 1 lakh earlier. This is effective April 1, 2014. That means, if you are in the 30% tax bracket, you can save Rs 15,000 more using Section 80C investments now, therefore taking your total tax savings to up to Rs 45,000 under this option.
As you may be aware, tax-saving funds enjoy the least lock-in (3 years) period, as compared with other traditional options such as NSC, PPF or 5-year bank deposits. Added to this, ELSS funds also enjoy capital gains exemption at the time of sale (making the gains tax free) and also have a record of providing superior returns, given that they are essentially equity funds.
If you have to make your investments under Section 80C, you would do well to start investing now as equity markets may also offer conducive opportunities now than later next year.
Reliance Tax Saver is a high beta, aggressive fund and is known to do well in rallying markets, but also fall hard in down markets. Hence, you would do well to use the SIP route to ensure you average costs in the fund.
An SIP in the fund over the past 3 years would have delivered a good 37% IRR, at least 6 percentage points higher than peers such as ICICI Pru Tax Plan and of course, far higher than its own point-to-point 3-year annualised return of 20.9%. The higher return through SIP suggests that the fund is volatile and hence, its NAV provides higher averaging opportunities.
For those looking for less aggressive options, you may wish to choose other tax-saving funds from our Select Funds list.
Since, you would have to hold a tax-saving fund for at least 3 years, we looked at the rolling 3-year returns (rolled daily) of the fund. It beat its benchmark 88% of the times, which is a fairly good record. However, again, rolling 1-year returns show much higher volatility.
Reliance Tax Saver’s phenomenal return over the past year was possible primarily because of an early build-up of a super-growth, super-cyclical portfolio, well before the actual rally in such sectors began.
For instance, even a year ago (June 2013), the fund had auto, capital goods and other industrial products as its top 3 sector exposures. In the above period, banking was only its fourth largest sector with just about 8% exposure. This strategy though, helped it withstand the banking rout well, although it underperformed overall in 2013 as it lost out on rallies in the IT and pharma spaces. Still, post September when the cyclical rally took off, the fund’s portfolio took flight with élan.
As of June 2014, the fund had a high-quality capital goods portfolio with cash-rich MNC names such as Honeywell Automation India, Siemens, Schneider Electric Infrastructure and Alstom T&D India. Strangely though, the top exposure was a desi stock – TVS Motor Company with as high as 10% holding. This stock, jumped 5 times in the past year.
The fund is managed by Ashwani Kumar.
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Disclaimer: Returns mentioned are past returns and are not indicative of future performance.