Tax-saving funds that made an impression
With the tax season on, it may be time for you to scout for tax-saving funds to benefit from tax deductions up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
Franklin India Taxshield, Religare Invesco Tax Plan, Canara Robeco Equity Tax Saver and ICICI Pru Tax Plan have been our select list of funds in the tax-saving category. These are well-established funds and have developed a consistent track record of performance, although they may not always turn out to be chart busters.
But there have been other funds in this category that have been conspicuous in the performance chart in recent times, although they do not have a very long track record. We take a look at 3 of these funds that have hogged the limelight.
Having been launched in the beginning of 2010, this fund has been in the limelight since its first year. Its three-year return is superior to even established peers. But 2 factors have worked in the fund’s favour since its launch.
One, for the first 3 years (almost until early 2013), the fund would not have seen any redemptions as it has a 3-year lock-in as an ELSS fund. That could have helped contain declines, especially in a turbulent market such as the one in 2011. The fund fell just 14.8% that year even as its benchmark, BSE 200, fell 27%.
Two, the fund does not hesitate to get into cash to protect downsides. In 2011, its equity holdings went lower than 90%. In 2013 too, it reduced equity exposure in March but quickly ramped it up. That the fund also has higher exposure to large-cap stocks also means that it does not bear the mid-cap brunt as much as a few other funds. Its average market cap for instance, is much higher than ICICI Pru Tax Plan.
The fund’s performance provides comfort for a ‘buy’; but given that it is only one year since the fund has a corpus that is open for redemption, you will do well to keep exposure to the fund limited. Completion of a 5-year record with similar colours would make this fund a core part of a tax-saving portfolio.
BNP Paribas Tax Advantage has changed hands since its launch under the ABN Amro AMC stable in early 2006 (which limits us from granting it the benefit of a long track record).
Its performance during its life time is therefore a bit chequered, with the fund beating its benchmark less than 50% of the times on a rolling one-year return basis since its launch. But this has significantly improved in the last 2 years since its takeover by fund manager – Shreyash Devalker.
The fund appears to position itself as a scheme with a large-cap bias in recent times, given that its large-cap holding (above Rs 10,000 crore market cap) is higher than many peers. That means, in a mid-cap driven rally, its participation may be a bit capped, if it continues its current strategy.
That it seeks to contain downsides is also evident by the way it holds underweight position (in relation to its benchmark BSE 200) in sectors such as finance, which took a knock in the last few quarters.
This fund managed to cross the Rs 100-crore AUM about a year ago, but is still much smaller than Axis Long Term Equity.
Launched a year before Axis Long Term Equity, this fund can claim to have gone through slightly longer market cycles than the former. The fund is what one would call a typical ELSS fund, with higher exposure to mid-cap stocks than the other two mentioned above.
But that also means that this fund can take a sharp knock in market falls. In 2011, for instance, the fund fell a good 7 percentage points more than larger peers such as Franklin India Taxshield. But it adequately made up for this in 2012 with higher returns that year.
Although laden with slightly more midcaps than the other two, the fund has played its sectors cautiously, with higher exposure to IT and pharma and lower weight to finance.
This fund too has a small asset size of close to Rs 150 crore.
Which should you choose?
If you are investing in equity funds for the first time and have tax-saving in mind, the established funds (mentioned in the beginning) should be your first choice.
If you already own some of the established ELSS funds, then you may consider limited exposure to one of the 3 funds mentioned above. Of them, IDFC Tax Advantage is suitable for a slightly aggressive investor as the fund could capitalise on a mid-cap rally. Axis Long Term Equity is suitable for a moderate-risk investor, while BNP Paribas Tax Advantage is suitable for a value-focused investor.