Best ELSS funds to save tax

Inall probability, your checklist for the month's errands reads something likethis: get the house painted before the festive season; refurbish the livingroom; finish the Diwali shopping. Now, add one more to this list: start taxplanning. But it's just October. Why should you start your tax planning rightnow? It should be done at the beginning of the new year when your employersends you the tax deduction notice, right?

Wrong.We have said this before and we are saying it again. Don't compress your taxplanning in the last one or two months of the financial year. Spreading yourinvestments over the year is crucial if you are investing in tax-saving mutualfunds. Stock markets have been very volatile in the past two years. If youdon't want to be caught on the wrong foot, take the SIP route instead of alump-sum investment at the end of the year.

Wehave shortlisted eight of the best tax plans for you. Performance is not theonly reason why these funds have been chosen. Each scheme has been handpickedon the basis of its risk profile, consistency of returns, investment style andquality of holdings. Using the same parameters, we have put these eight fundsin four broad categories (see tables). This is not a ranking of the ELSS funds;all are good performers. Your choice should depend on your risk profile andexpectations.



Large-capsolidity

Slowand steady wins the race. Both Franklin Templeton Taxshield and SBI MagnumTaxgain have a decidedly large-cap orientation. While this means muted returnswhen the markets are rising, it also means a limited downside when the goinggets tough. Franklin Taxshield fell less than the category in 2008, but hasrisen less than the average ELSS fund in 2009. In fact, both the funds haveunderperformed the category in the short term, but outperformed it over thelonger term. Investors can expect returns in line with the broader market.



Incidentally,Magnum Taxgain is the largest ELSS fund, with assets worth Rs 4,434 crorealmost 40% of the ELSS category. It tops the category for a five-year periodwith annualised returns of 35.56%. Don't expect an encore though. It is likelyto give middle-of-the-road returns.



Fast-trackgrowth

Forthose who like to drive a bit faster, the Sundaram BNP Paribas Taxsaver andFidelity Tax Advantage are good options. Though the former has underperformedthe category in 2009, don't let this stop you. The fund has given scorchingreturns over the longer term 19% in the past three years and 33% in the past fiveyears. It has 35% of its assets in mid-cap stocks, which can prove veryrewarding. Fidelity Tax Advantage has matched the category average, but thiscan change to outperformance due to the 25% exposure to mid-caps and 11% tosmall-caps in its portfolio.



Mid-capaggression

Nopain, no gain. If you can stomach a little risk, you have two winners in HDFCTaxsaver and Canara Robeco Equity Taxsaver. Both the funds have a sizeableexposure to mid-caps and small-caps. This aggression has paid rich rewards. WhileCanara Taxsaver has shot up 110% in the past six months, HDFC Taxsaver hasrisen 100%. It doesn't always pan out this way. HDFC Taxsaver was among thebest performing ELSS funds between 2002 and 2005, but slipped subsequently. Ithas now regained lost ground. On the other hand, Canara Robeco Taxsaver hasconsistently beaten the category average and has been the best performer since2006.



Turbo-chargedon small-caps

Small-capstocks are like performance enhancing drugs. In the six funds discussed earlier,the maximum allocation to small-caps was 12%. However, Taurus Taxshield andSahara Taxgain have invested almost 20% in this high-risk zone. This can bevery rewarding when the going is good, but a dream run can easily become anightmare.


Taurus Taxshield has given 76.12% returns in2009, the highest in the category, but its performance has been erratic. Thefund lost 10% in 2006 when the category rose by 30%. The next year, the fundshot up by 111%, while the ELSS average was 57%. Buy if you can handle therisk.

via Indiainfoline

ELSS is the best bet

Given a choice, retail investors should prefer ELSS (Equity Linked Saving Schemes) to other open-ended equity funds. For those with a long-term investment horizon, it is the best way to participate in equities. It is also the best option whether for availing tax benefits or making regular investments.

Why is that so? Take a situation where a bearish phase leads to redemption pressures affecting open-ended schemes. While complete statistics are not available, it has been seen that often in situations where the market turns bearish, open-ended equity funds bear the brunt of redemption pressures.

While ELSS are open-ended, they have a lockin period of three years. This often discourages short-term investors, including corporates and high networth investors, from putting money into ELSS. On the contrary, this can be considered a blessing in disguise as ELSS are generally not infested with short term investors.

Since investment in these fund were done to avail tax benefits, the ticket size was usually lower and assets were spread across many investors. The advantage is that no single/few investors rule the roost and fund managers are also not forced to sell stocks that they might otherwise want to hold.

In the recent fall in share prices (and also a small rebound), ELSS schemes have taken a greater beating than the rest. In the last one year, returns from such schemes were slightly lesser than those from plain-vanilla diversified equity schemes.

While ELSS gave a return of 42.2%, diversified equity funds gave a 44.1% return. One of the arguments which is being forwarded is that some of the ELSS have a greater leaning towards mid-cap stocks which took a greater beating vis-à-vis large caps in recent times. Yet, if you are a long-term equity investor, ELSS funds could be the best investment vehicle. Of course, it goes without saying that the scheme you choose should also have a good track record.

Investors in NFOs (New Fund Offering) need to tread carefully though. More importantly, an investor should prefer funds with larger AUM. While a smaller asset base no doubt makes fund management simpler, it also is susceptible to exit by large investors.

Another problem lies in its expenses – initial issue expenses that the fund houses are allowed to charge to the scheme.

The Securities Exchange of India (Sebi) more than a year back came with norms to include NFO related expenses in the entry load and not charge it to the scheme for the open-ended equity schemes. Ironically, many of the NFO collections were made before Sebi made this announcement. And it would continue with the old rules.

Previously, if you subscribed to an NFO, mutual funds will charge you issue expenses every year for the subsequent five years. Taking the worst case scenario, if a mutual fund charged initial issue expenses to the extent of 2% of the collections, then the expense ratio of the fund could be 3% ever year.

This is in addition to the normal cap of 2.5% p.a that Sebi allows mutual funds to charge for other recurring expenses. As an equity investor, if you think you have over-invested into equities, then it’s the right time to pull out from NFOs. Do your due diligence and check the NFOs which have underperformed in recent times and also have charged higher issue expenses, and then prune them.