ITI Long Term Equity Fund ELSS: NFO Review

ITI Mutual Fund has launched ITI Long Term Equity Fund on July 15, 2019, an Equity Linked Savings Scheme (ELSS) new funds offering. Equity Linked Savings Schemes are essentially open ended diversified equity mutual fund schemes with a lock-in period of 3 years. Investors can claim up to Rs 150,000 of deduction from the taxable income by investing in ELSS schemes under Section 80C of Income Tax Act, 1961. All types of domestic investors (including domestic companies) can invest in ELSS but only individuals and HUF can claim Section 80C tax benefits. There are no market capitalization segment related restrictions by SEBI on ELSS. ELSS is ideal investment solution for tax savings and long term wealth creation. The table below shows indicative returns for different tax saving investment options under Section 80C.

Source: www.indiapost.gov.in

You can see that, ELSS is most tax friendly investment option under Section 80C. Long term capital gains of up to Rs 1 lakh is tax free. Long term capital gains in excess of Rs 1 lakh will be taxed at 10%. If we compare long term historical returns of ELSS versus other 80C investment options, then ELSS would emerge as the best performing tax saving investment option across most periods.

Why is ELSS ideal for long term wealth creation?

Equity has been the best performing asset class in the long term over quite a long period of time. The chart below shows the 3 year rolling returns of NSE – 500 and moving average 3 year rolling returns of NSE – 500 over the last 20 years or so. We are showing 3 year rolling returns because ELSS has a lock-in period of 3 years. Average 3 year CAGR return of investment in NSE – 500 is 13.28%. You can see that equity generates more wealth than other fixed income tax savings options.

Compelling Risk Reward Proposition Average return for a 3 Year Investment 13.28% CAGR

Data Source – Jan 1995 to May 2019. ICRA Explorer. Calculations Internal. Returns above 1Y are CAGR Past Performance may or may not be sustainable in future

Source: ITI Mutual Fund

While ELSS investments have lock-in period of 3 years, they have the potential of giving superior returns over longer investment horizons. The chart below shows the maximum, minimum and average rolling returns of NSE – 500 for different rolling return periods over the last 20 years or so.

You can see that over longer investment tenures, volatility is lower and average annualized (CAGR) returns are higher. In our view, you should invest in ELSS not just for tax savings for but for your long term financial goals. Equity outperformed fixed income on all time frames (based on average returns). The longer you remain invested, higher will be your potential wealth creation.

Equity generates more wealth than other debt oriented tax savings options Outperformed on all time frames based on avg. returns.

Data Source – Jan 1995 to May 2019. ICRA Explorer. Calculations Internal. Returns above 1Year are CAGR Past Performance may or may not be sustainable in future

Source: ITI Mutual Fund

Systematic Investment Plan (SIP) is a highly disciplined and convenient way of investing for tax savings purposes. One of the points to remember when you are investing in ELSS through SIP is that, each SIP instalment will be locked in for three years.

There are several advantages of investing in ELSS through the SIP mode. You can invest for tax savings from your regular monthly savings. Once you set up your SIP in ELSS, you do not have to worry about tax planning every year. You can take advantage of market volatility through Rupee Cost Averaging of acquisition costs and thereby get superior returns in the long term. By investing through SIP over long tenures, you can leverage the power of compounding to accumulate wealth for your long term financial goals. The chart below shows rolling SIP returns for SIPs of different tenures. There is 0% Probability of Loss in 7 & 10 Year SIP’s with Average Return Profile over 15% CAGR.

Based on Monthly Rolling SIP on 1st working day of the month. SIP Valuation on the 1st working day of the next month. Data Source: ICRA Explorer. CalculationsInternal. Data Period: Dec 2004 to May 2019. Returns above 1Y are CAGR. Probability of loss is calculated by dividing total number of observations with the negative return observations. Past performance may or may not be sustainable in future. Investments in mutual funds should not be construed as a guarantee of any minimum returns. ELSS invests in equity and there is no capital protection guarantee or assurance of any return in mutual fund investment. Kindly consult your financial advisor before investing.

Source: ITI Mutual Fund

ITI Long Term Equity Fund – Investment Approach

• Margin of Safety, Quality of the business and Low Leverage will be the three pillars of the investment philosophy of the scheme


• Stock selection will predominantly be on bottom up approach basis.


• The fund managers will focus on investing in sound businesses which they understand well


• The stock universe for the scheme is divided into core stocks and tactical stocks. Core stocks are companies that have a strong and sustainable competitive advantage in their respective businesses


• Research efforts will primarily be focused on understanding the core set of good quality companies rather than focusing on a large number of mediocre companies


• Additionally, the fund managers would tactically invest in good companies going through temporary problems, with a possible upside catalyst.


• GARP style of investing - Growth at Reasonable Price

Portfolio Strategy

• The fund will generally be minimum 90% invested


• Number of stocks envisaged in the fund is 40 - 70 stocks


• The fund will be benchmark & sector agnostic.


• Differentiated strategy to manage risk during bullish and bearish market scenarios and suitably align the portfolio


• The fund will look to invest across market capitalizations


• Portfolio construction and allocation to Large/Mid/Small Cap segments will be actively managed based on the following:


• Assessment of valuation differential


• Expected earnings growth


• Business cycles


• Allocation towards market cap segments will be based on relative attractiveness of the segments and can vary between 0% to 100%

Why invest in ITI Long Term Equity Fund?

• ELSS is Best Tax Saving Investment Avenue with twin benefits of Long Term Wealth Creation and Tax savings


• ITI Long Term Equity Fund is a true diversified equity fund with flexibility to move across market cap segments.


• Lowest lock-in compared to other eligible investments u/s 80C


• Minimum 3 Year holding period instills investing discipline and also helps the fund manager in portfolio construction with long term wealth creation objective


• Ideal long term Systematic Investment Plan (SIP) Product - No need to wait till the year end to start investing


• Long term investment horizon and higher return potential lead to good compounding experience


• Investing in mutual funds is transparent. All mutual funds companies come under the purview of SEBI’s regulatory oversight with stringent disclosures, taking investor interests into consideration

ITI Long Term Equity Fund – NFO Facts

• Equity allocation will range from 80 – 100%, while fixed income (short term debt and money market) allocation will range from 0 – 20%.


• Mr George Heber Joseph and Mr Pradeep Gokhale will be the fund managers of this scheme


• Minimum investment amount will be Rs 500 and in multiples thereof


• There will be no exit load in this scheme


• This scheme will be available in direct and regular plans. Depending on your investment needs you can choose growth and dividend payout options


• Redemption of Units can be made only after a period of three years (lock-in period) from the date of allotment of Units


• The NFO is open for subscription and will close on October 14

Conclusion

In this post, we have discussed why ELSS is the best tax saving investment option under Section 80C for long term wealth creation. ELSS is the most liquid investment option under Section 80C of The Income Tax Act 1961.

In this post, we discussed some salient features of ITI Long Term Equity Fund (an equity linked savings scheme). The investment approach is robust and has the potential to generate superior alphas across different market conditions for long term investors. You can invest in the scheme either in lump sum or through SIP depending on your financial circumstances and needs. The stock market has come down considerably from its highs and the investment strategy of the scheme has the potential to generate long term returns in the current conditions. However, investors should have high risk appetite and long investment horizon for this scheme. Investors should consult with their financial advisors, if ITI Long Term Equity Fund is suitable for their tax saving needs.