Tax Planning in FY 2014 15 through Mutual Funds: The top 6 ELSS Schemes

We are in the third month of the current financial year. Unless you have already started your tax planning for FY 2014 – 2015, now is a good time to get serious about it. Remember, the longer you wait for start your investment, the more you will lose out on returns. Section 80C of Income Tax Act allows tax payers to claim deductions from their taxable income by investing in certain instruments. Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C, since the investors can avail double benefits of capital appreciation and tax savings. An ELSS is a diversified equity scheme with a lock in period of three years from the date of the investment. If you invest in an ELSS through a systematic investment plan (SIP), each SIP investment will be locked in for 3 years from their respective investment dates. There are both growth and dividend options for ELSS. For tax purposes, both long term capital gains and dividends from ELSS are tax free. Over a long time horizon, equity investments give superior returns compared to fixed income investment options like PPF, NSC and Fixed Deposits. A few months back, we had reviewed the top Equity Linked Savings schemes, based on CRISIL’s mutual fund ranking for the quarter ending Dec 31, 2013. Please refer to our article, Tax Planning: Review of Top 6 Mutual Fund ELSS Schemes. CRISIL has come out with a revised set of rankings, for the quarter ending Mar 31, 2013. In this article, we will again review the top performing ELSS, as a guidance to investors, looking for both tax saving and wealth creation options for FY 2014 - 2015.

As with all mutual fund investments, recent performance may not always be sustained in the future. One needs to look at a number of parameters to compare and rank schemes, relative to their peer group. CRISIL ranks ELSS based on several parameters like average 3 year annualized returns, volatility, portfolio concentration risk (both industry and company) and portfolio liquidity risk. On each of these parameters, each scheme is accorded a cluster rank (from 1 to 5) relative to its peer group. To derive a composite cluster rank, CRISL has assigned different weightages to each parameter, with average 3 year annualized return given the highest weightage at 50%, volatility 30%, industry concentration risk 10%, company concentration risk 5% and liquidity risk 5%. As compared to the last CRISIL ranking for the quarter ending, Dec 31, 2013, the list of top performing ELSS has not changed all that much. Here is the list of top 6 ELSS that you may want to consider for investment in FY 2014 – 2015.

• Axis Long Term Equity Fund (CRISIL Rank 1):

  This scheme has provided the highest 3 year annualized return at 20.75%. It has consistently outperformed all its peers in terms of annual returns over the 3 years period. The last one year performance has also been particularly strong. The trailing one year return of the fund (growth option) is nearly 45%. Volatility of returns is low relative to its peers. The annualized standard deviation of returns of monthly returns is 16% versus 17.5% for the category. Its portfolio is sufficiently diversified, with a large cap bias, with L&T, Kotak Mahindra, TCS, HDFC Bank, and HDFC accounting for less than 30% of its portfolio. However, the overall portfolio is sufficiently diversified with the top 10 stocks accounting to less than 51% of the portfolio. The fund is well diversified across sectors with the top 3 sectors, BFSI, Cyclical sectors and IT accounting to just over 50% of the portfolio.



• BNP Paribas Tax Advantage Plan (CRISIL Rank 1):

  The scheme’s 3 year annualized return stands at 18.2%, while 1 year annualized returns stand at 40.95%. Volatility of returns, as measured by annualized standard deviation of monthly returns, is quite low compared to peers, at 15.2%. In terms of portfolio composition, the fund has a large cap bias with HDFC Bank, RIL, Infosys, ICICI Bank and Infosys accounting for nearly 21%. The fund is well diversified with top 10 stocks accounting for only 36% of its overall portfolio. In terms of industry concentration, the top 3 sectors, BFSI, consumer cyclicals, and IT comprises of nearly, 50% of portfolio.



• Reliance Tax Saver Fund (CRISIL Rank 2):

  The 3 year annualized return of this fund is 19.9%. While the volatility of returns is higher relative to its peer set at 24%, it has provided higher annualized returns relative to most peers over 1 year periods, at nearly 57%. The fund portfolio has a mid cap bias high growth bias. The top 5 companies, TVS Motor, SBI, Alstom, ACC and Divi’s Lab account for 26% of the portfolio value. In terms of sectoral allocation Consumer Cyclicals, Industrials and materials account for over 62% of portfolio.



• Principal Tax Saving Fund (CRISIL Rank 2):

  The annualized 3 year return is 20.1%. The one year trailing annualized return is 50.3%. Volatility of returns, measured in terms of annualized standard deviation of monthly returns, is higher relative to its peer group, at 19.95% versus 17.5% for the ELSS category. The portfolio is fairly well diversified, with the top 5 holdings, ICICI Bank, ITC, RIL, Motherson Sumi and Aurobindo Pharma, accounting for less than 21% of the portfolio. The top 10 holdings account for about 42%. In terms of industry exposure, the Top 3 sectors, Banking / Finance, Consumer Cyclicals and IT account for about 51% of the portfolio.



• ICICI Prudential Tax Plan (CRISIL Rank 2):

  The annualized 3 year return is 17.3%. The fund has provided annualized returns of 51.8% in the last 1 year period respectively. The volatility of returns is slightly on the higher side compared to the ELSS category, at 18.6%. The portfolio is fairly well diversified across large cap companies, with the top 5 holdings Infosys, ICICI Bank, Cipla, HDFC Bank and Bharat Electronics accounting for nearly 25% of the portfolio value, while top 10 holdings account for less than 41% of the portfolio. In terms of industry exposure the fund is well diversified with the top 3 sectors, BFSI, Capital Goods and IT accounting for nearly 60% of the portfolio.



• Religare Invesco Tax Plan (CRISIL Rank 2):

  The annualized 3 year return is 19.9%. The fund has also performed very well over the last 1 year period, with annualized returns of 35.5%. Volatility of returns is quite low relative to its peers at 16.5% versus 17.5% for the category. In terms of company concentration, the fund is fairly well diversified, with the top 5 companies TCS, HDFC Bank, HDFC, Britannia Industries and L&T account for only 26% of the portfolio. Even from a Top 10 holding perspective, the fund is well diversified, with the Top 10 portfolio holdings accounting for less than 43%. In terms of industry concentration BFSI, Capital Goods and IT, account for over 53% of the portfolio.

¹CRISIL Rank: 1 - Very Good; 2 - Good; 3 - Average; 4 - Below Average; 5 - Relatively Weak

Conclusion

In this article, we have reviewed the top ELSS funds for FY 2014 – 2015. Investors should consult with their financial advisers, if these funds are suitable tax saving investment options for them.