Equity Linked Savings Schemes, or ELSS, are tax-saving funds where investments qualify for a tax deduction up to Rs 1,50,000 under Section 80C.
Here are five funds that Morningstar India analyzed last year. Featured here are Reliance Tax Saver and DSP BlackRock Tax Saver, two funds that are among the top 10 performers in the 3-year annualized return category.
Sundaram Tax Saver
Krishnakumar follows a combination of a top-down and bottom-up approach and seeks to invest in growth stocks which tend to double over the fund’s investment horizon. While the fund house has a fairly strong thematic undercurrent that drives sector selection, stock selection remains primarily driven by fundamentals.
The manager tries to balance the stock’s perceived return, growth, and valuations while maintaining a lower liquidity risk. The manager combines absolute and relative valuation techniques using discounted cash flow models and quantitative ratios such as return on equity, EV/EBITDA, P/E, and price/book value among others to make investment decisions.
Research analysts use a "5S" model to evaluate a business--sustainability, scalability, soundness of promoters, sustainable competitive advantage through strong brand promotion, and sustainability of cash flows. They look at investing in high-quality companies with differentiated businesses.
On an annual basis, the fund’s performance has been spotty. There are many years when it has unperformed the category average, but bounces back. But in the long run, it either hovers around the category average or beats it marginally.
- Fund: Sundaram Tax Saver
- Category: ELSS (Tax Savings)
- Star Rating: 3 stars
- Analyst Rating: Neutral
- Fund Manager: S Krishnakumar
- Expense Ratio: 2.61%
- Date of analysis: February 2016
- Turnover: 54%
- Investment Style: Large Growth
You can read the brief analyst note here. Reliance Tax Saver
Ashwani Kumar plies a growth-at-a-reasonable-price strategy. He typically scouts for companies with strong and sustainable business models. He will be flexible with valuations and pay what he thinks is fair price, given the company’s growth prospects.
He tends to take a two- to three-year view on stocks and focuses on factors such as return on equity and return on capital employed when evaluating companies.
There is also a qualitative overlay in the analysis. He looks for factors, including management quality, superior technology, favourable cost margins, and brand equity, that can give the company a sustainable competitive edge vis-à-vis the competition. The top-down approach is important; factors such as the interest-rate scenario, barriers to entry, pricing power, policy measures, and expected consumption/spending patterns are considered when investing.
In rising markets, Kumar may indulge in short-term trades and tactical plays. He tends to trade the same set of stocks to capitalise on short-term opportunities.
On an annual basis, the returns can fluctuate: a year of underperformance followed by a year of overperformance. A vivid example is 2012, where the fund put up an amazing performance, but underperformed in 2011 and 2013. However, on a long-term basis, it performs impressively.
- Fund: Reliance Tax Saver
- Category: ELSS (Tax Savings)
- Star Rating: 4 stars
- Analyst Rating: Neutral
- Fund Manager: Ashwani Kumar
- Expense Ratio: 2.42%
- Date of analysis: February 2016
- Turnover: 40%
- Investment Style: Large Growth
You can read the brief analyst note here.
ICICI Prudential Long Term Equity
Joseph plies a benchmark-agnostic multi-cap strategy here. He uses a combination of top-down and bottom-up approaches for selecting stocks, with the latter being more dominant.
Joseph is fairly valuation-conscious; though he invests in both growth and value stocks, he avoids paying too much for an issue.
He prefers stocks that are cheaper than their peers and historical valuations on the price/book and price/earnings measures. His investment style is contrarian at times, with investments in beaten-down stocks, particularly when the issue is negatively affected by poor market sentiment.
Joseph has made few modifications in the fund’s strategy, with an intention of eliminating some of its risky aspects that do not gel with his investment style. Short-term trading is no longer a part of the investment strategy, as Joseph believes in a buy-and-hold approach.
The fund had a mediocre track record when it was run as a pure small/mid-cap offering in the past. It staged a remarkable turnaround when erstwhile manager Sankaran Naren adopted a multi-cap approach early 2009.
In 2009 and 2010, the fund put up some great numbers. Between 2009 and February 2011, under Naren, the fund clocked a return of 47%, topping the category on both return and risk-adjusted return.
- Fund: ICICI Prudential Long Term Equity
- Category: ELSS (Tax Savings)
- Star Rating: 4 stars
- Analyst Rating: Neutral
- Fund Manager: George Joseph
- Expense Ratio: 2.47%
- Date of analysis: April 2016
- Turnover: 855%
- Investment Style: Large Growth
You can read the brief analyst note here DSP BlackRock Tax Saver
Rohit Singhania implements an unconstrained, benchmark-agnostic approach without any bias towards a stock or sector while constructing the portfolio. He manages the fund with a rather aggressive investment style, which entails churning the portfolio frequently to capitalize on the investment opportunities arising in the interim. He will therefore not hesitate to increase or reduce allocations swiftly in response to rising and falling stock prices. Additionally, he believes in buying and selling huge amounts to make a meaningful difference in the portfolio.
Interestingly, the manager typically scouts for investment opportunities in large-cap names where he sees any trend emerging with regards to (for instance) cash flows or ROE. The mid-cap portion of the portfolio is fairly stable, which is in line with his belief that they need more time to deliver, which in turn necessitates a longer investment horizon.
Given Singhania’s investment style, the fund displays an apparent large-cap bias as it accounts for nearly 65%-75% of the portfolio, with the balance invested in small/mid-cap stocks.
Taking cash calls is not a part of the strategy and is capped at roughly 7.5% of the portfolio. Singhania constructs a fairly diversified portfolio of 60-70 stocks, with the top 10 stocks as of November 2016 accounting for 37% of the portfolio as against 46% in July 2015 when he took over the fund.
The fund’s performance under Apoorva Shah has been noteworthy. From July 2012 to June 2015, the fund clocked an annualised return of 27%, outperforming the category average (25%) and the benchmark (19%). We are yet to draw any meaningful conclusion under Rohit Singhania’s watch (July 2015 to date).
- Fund: DSP BlackRock Tax Saver
- Category: ELSS (Tax Savings)
- Star Rating: 5 stars
- Analyst Rating: Neutral
- Fund Manager: Rohit Singhania
- Expense Ratio: 2.57%
- Date of analysis: December 2016
- Turnover: 120%
- Investment Style: Large Growth
You can read the brief analyst note here.
L&T Tax Advantage
This was initially a Fidelity fund which found its way into the L&T AMC stable after the acquisition.
Fund manager Lahiri prefers to invest in good businesses at reasonable valuations or companies with improving fundamentals. While there is a focus on bottom-up stock selection, a top-down overlay is exhibited by the fund’s overweight position in industrials and basic materials on expectations of an improvement in economic growth.
The fund typically holds about 55-65 stocks with the top 10 holdings currently constituting about 35% of the total portfolio. The allocation across market capitalisation can change significantly depending on the performance of companies.
While large caps ranged between 50% and 80% in the past, the current allocation stands at around 55%. Exposure to a single stock is generally maintained below 6% of the portfolio to manage risk.
Lahiri has been managing this fund since November 2012. The fund's performance under his stewardship has been average. In 2013, the fund’s return was average followed by 2 years of underperformance of the category average. Last year was a fairly good year for the fund.
- Fund: L&T Tax Advantage
- Category: ELSS (Tax Savings)
- Star Rating: 4 stars
- Analyst Rating: Neutral
- Fund Manager: Soumendra Nath Lahiri
- Expense Ratio: 2.43%
- Date of analysis: December 2016
- Turnover: 28%
- Investment Style: Large Growth
You can read the brief analyst note here
