The ELSS category is very competitive. It comprises a motley mix of funds with strong and established strategies. Funds that fall under this category are diversified equity funds with no restriction on the market cap. So they could be multi cap or large cap or mid cap oriented.
Equity Linked Savings Schemes, or ELSS, fall under Section 80C of the Income Tax Act. Investments made here are eligible for a deduction up to Rs 1,50,000.
DSP Tax Saver
- Date of Analysis: March 2019
- Analyst Rating: Neutral
- Fund Manager: Rohit Singhania
The fund’s gestation period will be longer in a more competitive category with strong and established strategies.
There have been significant changes within the investment team as well as at the fund-house level. In May 2018, BlackRock and DSP parted ways from their decade-old joint venture. The equity investment team also witnessed significant turnover, with some of its key managers-- S. Naganath (CIO), Anup Maheshwari (CIO of equities after Naganath), and Harish Zaveri-- exiting the fund company between 2017 and 2018, which is a cause for concern.
The fund’s strategy, however, has stayed consistent under Singhania. He runs it in line with its investment mandate, which allows him to adopt a fluid investment approach without any bias or restrictions in terms of stocks or sectors. In the manager’s own words, this fund doesn’t have a defined investment approach, which in turn provides him the liberty to capitalise on any investment opportunity that he sees in the market, provided it makes a grade on his selection parameters.
Consequently, the fund’s portfolio turnover tends to be on the higher side.
While an unconstrained process can be very rewarding, it is risky, too. A wrong bet can lead to significant underperformance. Also, the absence of a rigidly defined method means investments are made on a somewhat intuitive basis. Hence, it must be noted that the success of the investment process largely depends on Singhania’s execution skills.
We believe that the fund is yet to make a cut for itself within the category and needs more time before it could qualify for an upgrade.
ICICI Prudential Long Term Equity
- Date of Analysis: November 2018
- Analyst Rating: Neutral
- Fund Manager: Sankaran Naren, Harish Bihani
There has been another change in manager in this fund. After taking over its mantle in October 2015, George Herber Joseph has relinquished the fund’s management responsibility effective November 5, 2018.
This fund has passed through multiple hands in the past few years. CIO Sankaran Naren (October 2005 till February 2011), Munzal Shah (March 2011 till May 2011), and Chintan Haria (June 2011 till September 2015) have managed this fund earlier. George Herber Joseph started comanaging this fund along with Haria from April 2015 and took over as the lead manager in October 2015. He comes from ICICI’s portfolio-management-services division.
The following report was based on our opinion on Joseph and his investment style.
Pleasingly, and despite the changes, the investment strategy largely stays the same.
However, within the defined framework, Joseph has realigned the portfolio since taking over the fund in line with his investment thesis and understanding of macroeconomic scenarios. Joseph plies a free-flowing multi-cap strategy and follows a benchmark-agnostic approach for constructing the portfolio. He is fairly valuation-conscious and stays away from expensive stocks/sectors. He scouts for companies having good management with strong long-term track records, good free cash flow generating capabilities, and strong balance sheets. While investing, Joseph prefers staying away from investing in highly leveraged stocks.
Admittedly, the fund hasn’t done badly despite the changes at the helm, with the year 2017 being an exception. This year, the fund underperformed substantially as the manager’s valuation-conscious investment approach and strategy of taking contra bets has been out of favour, which dragged its overall performance under Joseph’s stewardship down with regard to benchmark index and category peers. However, these are still early days for Joseph at the helm here. We would like to evaluate his ability in executing the process over a market cycle to build conviction.
Axis Long Term Equity
- Date of Analysis: November 2018
- Analyst Rating: Silver
- Fund Manager: Jinesh Gopani
Jinesh Gopani has been managing this fund since April 2011 and has been able to execute the strategy with consistency so far. We think that he stands out as an efficient stock-picker who believes in investing based on his high conviction ideas.
Gopani looks for companies which have the capability to grow over a three- to five-year time period and places a lot of emphasis on finding quality names at reasonable valuations. The manager typically invests about 50%-70% of the portfolio in large cap stocks. The team follows an in-depth process that aims to identify under-researched ideas. The research process and the manager’s style of investing gives the portfolio a distinct character that reflects Gopani’s high-conviction ideas. The portfolio is markedly benchmark-agnostic and typically shares a very low overlap of about 25%-30% with the S&P BSE 200 Index. From a valuation perspective, they can tend to invest in stocks that are slightly expensive in relative terms as long as they meet their internal quality and growth criterion.
Axis Mutual Fund is amongst the few AMCs that stands out in terms of their well-defined and differentiated product offerings. In 2016, the AMC lost two of its founding members from the investment team and elevated portfolio manager Jinesh Gopani’s role to head of Equity. The AMC was also quick to hire two new managers into the team. Though there was a transitionary phase that the AMC went through, the team has remained stable since then.
Despite being the largest fund in the category, the fund’s long-term performance has remained positive. The AMC has internal limits in terms of capacity and we think that this is a positive.
Overall, we think that the fund has remained true to its mandate and will continue to be managed in the same manner going forward. Our conviction rests on Gopani, his consistent and efficient execution of the strategy and the positive long-term performance. Having said that, there is a clear key-person risk associated with him.
Notwithstanding the fund’s underperformance in 2016 and 2017, we think that the fund’s long-term performance holds the fund in good stead.
HDFC TaxSaver
- Date of Analysis: October 2018
- Analyst Rating: Silver
- Fund Manager: Vinay Kulkarni
HDFC TaxSaver Growth is managed by Vinay Kulkarni, who is an experienced and competent manager, in our opinion. He is backed by HDFC's strong and stable investment team, which we think stands out for its research capabilities. Kulkarni is well-ingrained into the HDFC investment philosophy and has a reasonably strong track record.
The investment process is key to our favourable view here: Kulkarni's approach predominantly favours large-cap stocks, investing roughly 70% to 80% in this segment and the rest in small/mid-caps. Like all managers at HDFC AMC, he places a lot of emphasis on understanding the business and has an inherent quality bias while investing. His portfolio holdings typically span a two- to three-year investment horizon. However, it isn't uncommon for stocks to feature in the portfolio for significantly longer time frames.
We think Kulkarni's focus on the long-term strength of a business is a positive, and it complements the firm's broader style of investing.
While Kulkarni considers the opportunity cost of holding a stock over the long term, he does not tend to exit stocks solely based on valuations.
Kulkarni also takes large stock and sector bets, often against the grain. We believe this is linked to the research-intensive approach and the caliber of the investment team, which helps pull off such a strategy. Overall, we are fairly impressed with his investment style and solid execution of the investment process. We also note that the process is well-defined and repeatable.
That said, certain risks associated with the investment process need to be highlighted. Kulkarni's sizable high-conviction bets can result in some underperformance over the short term.
Nevertheless, we believe that over longer time frames when markets experience a full cycle, the manager's investment style and expertise will hold the fund in good stead.
SBI Magnum Tax Gain
- Date of Analysis: October 2018
- Analyst Rating: Neutral
- Fund Manager: Dinesh Balachandran
Dinesh Balachandran took over the reins of this fund in September 2016, when its erstwhile manager of almost nine years, Jayesh Shroff, exited the fund company. This is his first stint at running a diversified equity fund.
We reaffirm the fund’s Morningstar Analyst Rating of Neutral.
Despite the change at the helm, the fund’s broader framework stays consistent. It continues to be a benchmark-aware predominantly large cap offering. However, Balachandran’s investment style is strikingly different from that of his predecessor.
Shroff plied a growth-oriented investment approach with valuation playing second fiddle. He was strict with his stock selection and typically preferred investing in leaders within a sector. This lack of focus on valuations combined with penchant for growth stocks resulted in the fund running a big risk of underperformance in market downturns.
Balachandran, on the other hand, lays extensive focus on valuations. He is flexible with his stock picks, too. He won’t shy away from investing in a company that is not best in class but has a good risk/reward prospect. Given the change in investment style, the fund’s current portfolio construction is significantly different from the way it was constructed by Shroff.
This has led to a change in its risk/reward profile and performance pattern. For instance, given Balachandran’s value focus, the fund can be expected to struggle in momentum driven and growth-oriented markets.
Historically, we have not been too impressed with this offering and have maintained a Neutral rating on it for a long time. Balachandran has a tough task in hand of competitively establishing this fund among peers. But these are yet early days for him as a portfolio manager. His managerial skills, execution capabilities and long-term viability of the investment strategy under him are yet untested and need to be evaluated over time.
Reliance Tax Saver
- Date of Analysis: August 2018
- Analyst Rating: Bronze
- Fund Manager: Ashwani Kumar
Manager Ashwani Kumar differentiates Reliance Tax Saver from a typical ELSS fund on several counts. Kumar can invest across market-cap segments based on valuations. Further, he runs a concentrated portfolio and can tend to invest in slightly less-liquid stocks, given the 3-year lock-in period.
Kumar seeks to invest in companies with strong growth prospects that he believes are trading at a discount to their intrinsic value. In effect, he attempts to balance both growth and valuation aspects while investing. This approach can lead him to invest in the small/mid-cap space where markets tend to misprice stocks because of low coverage. It came as no surprise that he invested a substantial portion of the fund in small/mid-caps during the rally in 2016. When building the portfolio, Kumar typically takes sizable underweight/overweight positions versus the S&P BSE 100 Index and the category based on his conviction. This unconstrained approach provides the manager with adequate flexibility to choose stocks and sectors from across the board.
However, such a strategy’s success relies heavily on the portfolio manager’s ability to execute it skillfully.
Given Kumar’s investment style, the fund’s performance can be driven by market cyclicality. Clearly, given the fund’s concentrated approach, the performance of the underlying sectors could affect the fund’s returns. The current portfolio reflects a greater allocation to large-cap stocks, and we are of the view that Kumar is far more adept at operating in the large-cap space.
The fund has an experienced manager at its helm, is supported by a strong team and has remained a true to label product. The fund’s blistering showing in 2012 and 2014 shows what it can accomplish when things fall into place, but, given the construct, the fund will tend to be more volatile than its peers. Overall, we have a positive opinion on the fund.
Franklin India Taxshield
- Date of Analysis: Since this fund was analysed a year ago, Morningstar’s director of fund research, Kaustubh Belapurkar, shares his views
- Analyst Rating: Bronze
- Fund Manager: Lakshmikanth Reddy
Franklin Tax Shield Anand Radhakrishnan handed over responsibility of this fund to Lakshmikanth Reddy in 2016. He has shown promise, evident in the short-time period with this AMC (he was employed at an insurance firm prior to this stint). It helps that he is backed by an excellent team.
While he looks for growth stocks, he does not pay an obnoxiously high premium and is cognizant of valuations. Radhakrishnan was largely focused on large caps. Reddy has tweaked that a bit.
The exposure to mid caps is around 30-40%. Though the tilt is towards large caps, he will be more flexible when the time is right. Overall, a good combination of a rock-solid team and a process which gives us comfort that over a market cycle, a fund like this should do exceedingly well.
L&T Tax Advantage
- Date of Analysis: Since this fund was analysed over a year ago, Morningstar’s director of fund research, Kaustubh Belapurkar, shares his views
- Analyst Rating: Bronze
- Fund Manager: Soumendra Nath Lahiri
One thing we have come to appreciate of Soumendra Nath Lahiri is his knack of picking stocks before others. We have seen him and his team doing that, where they probably are among the first buyers, well before the Street acknowledged those stocks. So it's a testimony to the process they employ that actually identifies these ideas. This fund house has a pretty stable set of analysts and managers. In this fund, Lahiri runs a multi-cap strategy. He builds a diversified portfolio with a typical cap of 6% on a holding.
