Tax savings should ideally be a round the year investment plan

2017 was a terrific year for equity mutual fund investors. Though the markets have corrected a bit from the recent peak, do you expect the bull market to continue in 2018? What are some of the factors that could drive the market forward in 2018?

2017 indeed was a terrific year for Mutual Fund Industry as a whole. The industry collectively managed to garner AUM equal to the AUM managed in first 2 decades of existence, in one single year. The disruptions caused due to GST will be streamlined and the benefits will start rolling down. After a lack lustre performance in terms of earnings growth over the last several years, the earnings are expected to bounce back. The current market corrections were a result of corrections in global markets specially the US markets; I believe the Indian growth story is still very strong and the markets should deliver positive returns albeit with bouts of volatility.

Any corrections should be used by investors to invest. We recommend investments using STP/SIP route.

As the markets have corrected moderately in the recent past and also that mid and small cap stocks valuations are at all time-high, what according to you should be the strategy for retail investors investing now? Lump sum or through SIPs?

Mutual fund as an investment vehicle has everything to offer to every kind of investor. Hence, an investor who wants to invest lump sum or through SIPs will find a Mutual Fund scheme which suits his risk appetite, return expectation and investment horizon.

An Investor has to access his risk tolerance and investment goals in mind and plan his investments. He can, of course, use the services of a professional investment advisor/ wealth manager who can guide him through the various options. As far as equity markets goes due to expected volatility in coming year, staggered investing would be an ideal way to participate in the market. So we would recommend investors to use SIPs or STPs to make investment into equity schemes. And every correction one should look at as an opportunity to increase his allocation to equities.

As the tax saving season is on for retail investors in India, what is your suggestion to them in terms of planning their Section 80C investments and can you explain them why ELSS should be their preferred choice?

Tax savings should ideally be a round the year investment plan, but unfortunately most investors tend to do it towards the last quarter of the financial year. One should look at starting an SIP into an ELSS scheme in the beginning of the financial year itself so that he can invest at various levels of the markets hence benefiting from the rupee cost averaging and this method also does not pinch his pockets as a big outflow is not going in one particular month towards saving tax.

When it comes to savings tax, ELSS schemes offer a much better alternative under Section 80C, because apart from the tax saved, the investor can earn returns which are commensurate with the equity markets with one of the lowest lock-in period of 3 Years compared to other Sec 80 C instruments. Every retail investor should consider ELSS as a tax saving avenue if they want their money to work harder for them.

What is the unique proposition of Indiabulls Tax Savings Fund?

Indiabulls Tax Savings Fund is a fund which aims to ride the ‘Brand’ story. Companies that are or have strong brands will benefit the most from the growth that India will experience in coming years. As indicated in the recent IMF reports, India would be one of the fastest growing countries in the world. Further companies with strong brands will be able to tide over the volatility that the broader markets experience. These companies have the entire ecosystem, in which they operate, supporting them, right from the suppliers to customers to employees. For example, a supplier will supply at a lower cost just to get associated with the brand and further on, a customer is willing to pay a little extra due to the strong image the brand has created and the trust they have in the particular brands. Even attracting good talents and retaining employees is very easy for a company with a strong brand.

A strong Brand is created not only because of its final product;but also because of the strong business model that supports it. Such companies enjoy sustainable competitive advantages; have a strong management with a track record of managing well during complete business cycles. Indiabulls Tax Savings Fund endeavours to create a portfolio of such companies.

What has been the investment strategy for Indiabulls Tax Savings Fund?

As mentioned earlier, the fund will have companies who are strong brands or own strong brand/s. Ideally companies that are segment leaders or challengers would be part of our portfolio. Fund will invest across market capitalisation and sectors. Further, stocks shall be predominantly growth oriented selected based on bottom up analysis. The fund will be managed as a Diversified Multicap fund. We will continue to use our robust fundamental research policy to shortlist every stock.

Which sectors are you currently focused on as far as portfolio of Indiabulls Tax Savings Fund is concerned?

In line with the broad theme of ‘Brands’, portfolio is predominantly domestic consumption oriented. Key overweight sector are Auto & auto ancillaries, FMCG, Consumer Durables, Oil & Gas & Construction sectors.

Historically, good performing ELSS schemes have beaten the returns of traditional tax saving investments like PPF, tax savings FD and NSC etc. with a good margin. This was the primary reason we have been seeing good flows into the ELSS category for many years now. However, the Budget proposal of long term capital gains tax (LTCG) may dampen the spirit of ELSS investors. What do you think?

There is no reason to let LTCG affect the investments in ELSS, because even after taking LTCG into consideration post tax returns could be much higher for this category compared to other Section 80 C instruments over a longer period. Further, the LTCG will be applicable on capital gains more than a lakh of rupees, which could further reduce the tax burden.

Should investors opt for Growth option or Dividend option post introduction of 10% dividend distribution tax on equity mutual fund schemes and also proposal of long term capital gains (LTCG) tax?

Ideally this depends on whether the investor wants any interim cash flows or not. In my personal opinion the investor should choose the Growth option as this allows his entire investment to enjoy the benefit of compounding over longer periods of time. Unless the investor chooses to use the dividend transfer plans, if allowed, to invest the dividends into another scheme thereby diversifying his portfolio further.

“Suren Kochhar is the Chief Business Officer of Indiabulls Asset Management Limited. The views expressed in this article are the author’s own and do not reflect the view of Indiabulls AMC Ltd.“

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