Principal Tax Savings Fund: Great wealth creation track record by this ELSS scheme

With less than 60 days remaining in this financial year, investors should ensure that they complete their tax planning for the year as soon as possible unless they have already completed. As a tax payer you can claim deduction of up to Rs 1.5 Lakhs from your gross taxable income in this assessment year (AY 2020-21) by investing in mutual fund Equity Linked Savings Schemes (ELSS) under Section 80C of Income Tax Act.

For the next assessment year (AY 2021-22), the Government has provided investors the option of sticking to the current income tax rates (as per their income slabs) and claiming exemption like Section 80C, 80D, HRA etc. or moving to the new tax regime with lower tax rates for incomes below Rs 15 lakhs but giving up most of the exemptions. ELSS not only helps tax payers save taxes, it also helps them create wealth in the long term. Each investor should do their tax calculations as per the old and new tax regimes according to their personal situations (e.g. their income slabs, how deductions they are claiming / can claim, their financial priorities / goals etc.) and decide which regime is more advantageous.

Suggested reading – Mutual Fund ELSS schemes: Best way to save taxes and create wealth

In our view, one should not take a narrow view of tax planning but link tax planning with long term financial planning and goals. ELSS investments not only enable you to save taxes but also create wealth for your long term financial goals. Historical data shows that ELSS has been the best performing tax saving investment over a sufficiently long investment horizon.

If you invested Rs 1 Lakh in Principal Tax Savings Fund at its inception in 1996, your money would have multiplied over 30 times to more than Rs 30 Lakhs.

Scheme Overview

Principal Tax Savings Fund was launched in May 1996 and has Rs 408 Crores of Assets under Management (AUM). The expense ratio of the scheme is 2.53%. Principal Tax Savings Fund is helmed by Sudhir Kedia. The chart below shows the NAV growth of the scheme over the last 5 years.

Source: Advisorkhoj Research

The chart below shows the growth of Rs 10,000 lump sum investment in Principal Tax Savings Fund versus PPF over the last 10 years. You can see that the scheme outperformed PPF and gave nearly 3X returns.

Source: Advisorkhoj Research

Rolling Returns

Regular Advisorkhoj readers know that rolling return is the possibly the best measure of mutual fund performance because it measures performance consistency across different market conditions. Rolling returns tell investors whether a fund manager benefited from market conditions by taking more or less risk or if the fund manager was able to deliver alphas across different market conditions through superior stock selection and fund management. The chart below shows the 3 year rolling returns of Principal Tax Savings Fund versus its benchmark (Nifty 500 TRI) over the last 5 years. We have chosen a 3 year rolling returns period because ELSS have a lock-in period of 3 years.

Source: Advisorkhoj Rolling Returns Calculator

You can see that Principal Tax Savings Fund was able to beat its benchmark most of the time over the last 5 years but has underperformed in the short term. Principal MF changed the fund manager of this scheme last year and in our view, the new fund manager must be given sufficient time to implement his ideas. Let us now see how Principal Tax Savings Fund performed against the ELSS category, in terms of 3 years rolling returns over the last 5 years.

Source: Advisorkhoj Rolling Returns Calculator

Investors can see that Principal Tax Savings Fund was able to outperform the category consistently across different market conditions over the last 5 years.

Market Capture Ratios

Market rallies and crashes are both realities of equity investing. Performance in different market conditions is measured by a set of metrics called market capture ratios. In this tool we see the performance of a fund both in up-market (months in which the benchmark index was up) and down market (months in which benchmark index was down). The ratio of the average monthly returns of a scheme versus average monthly returns of the benchmark when the market was up is known as Up-market Capture Ratio. The ratio of the average monthly returns of a scheme versus average monthly returns of the benchmark when the market was down is known as Down-market Capture Ratio. The table below shows the Up Market and Down Market Capture Ratios of Principal Tax Savings Fund, over the last 10 years.

Source: Advisorkhoj Research Market Capture Ratios

Up Market Capture Ratio of more than 100% implies that the fund manager is able to generate higher than market benchmark returns when market is rising. Down Market Capture Ratio of less than 100% means that the fund manager is able to provide some downside risk protection when market is falling. If Up Market Capture Ratio is more than Down Market Capture Ratio, it implies that the fund manager will be able to generate good returns over a sufficiently long investment horizon because in a sufficiently long investment horizon, there are usually many more up market periods compared to down market periods.

SIP Returns

The chart below shows the growth of Rs 10,000 monthly SIP investment in Principal Tax Savings Fund (Growth Option) versus PPF over the last 10 years. With a cumulative investment of Rs 12 lakhs you could have accumulated a corpus of Rs 22.5 lakhs (versus Rs 18.3 lakhs in PPF). The annualized SIP returns (XIRR) over the last 10 years was 11.8%

Conclusion

Principal Tax Savings Fund has nearly 24 year track record of wealth creation. You can invest in Principal Tax Savings Fund in either lump sum or SIP, depending on your financial situation. You can link investments in this scheme not just for tax savings but also for your long term goals like retirement planning, children’s higher education, children’s marriage, wealth creation etc. The scheme has a lock in period of 3 years, but to get the best returns you should be prepared to remain invested for longer periods of time. Investors should consult with their financial advisors if Principal Tax Savings Fund is suitable for their tax planning needs.