ELSS: AN OPTION BEYOND TAX SAVING
KIRAN KUMAR K V
fund schemes, comparable with non-ELSS schemes. These schemes have gone ahead to deliver superior returns than regular open-ended non-ELSS mutual funds, due to certain inherent features of the scheme. Namely, ELSS funds, in general follow a passive and growth style of investment, which allows fund managers to take longer term calls and sustain it. The redemption pressure is the lowest in these schemes, compared to regular funds that again give the fund managers the leeway to take long term calls, especially in mid and small sized companies.
Thanks to the ease of investing and the continued patronage of fiscal policymakers, today ELSS stand deviated from age-old LIC-for-tax-savingmindset and in turn provide the business world with the household supply of capital. Almost every fund house, excluding few newer ones, offers at least one ELSS product as part of their product portfolio. There are schemes that have been consistently delivering better returns than their own non-ELSS counterparts. That does not mean, an individual can consider investing all his ELSS allocation into one fund, nor does it also mean he can take smaller exposures into a number of funds. Remember, too much diversification eats away into the superlative performance of any individual fund.
Refer the below table-1, a list of ELSS funds, top performing funds as on 12-Sept-16 (Source: www.valueresearchonline.com) based on their 3 year return percentage.
Fund | VR Rating | Launch Date | 3-Year Return (%) | Expense Ratio | Net Assets (Rs. Cr) |
Axis Long Term Equity Fund | 5 | Dec-09 | 32.78% | 1.98% | 10290 |
DSP Blackrock Tax Saver Fund | 4 | Jan-07 | 30.20% | 2.53% | 1364 |
Birla Sun life Tax Relief ’96 | 4 | Mar-96 | 30.13% | 2.42% | 2425 |
Invesco India Tax Plan | 4 | Dec-06 | 29.61% | 2.47% | 332 |
Birla Sun life Tax Plan | 4 | Feb-99 | 29.06% | 3.01% | 401 |
Franklin India Tax Shield | 4 | Apr-99 | 28.32% | 2.41% | 2306 |
Tata India Tax Savings Fund | 4 | Mar-96 | 28.02% | 2.94% | 393 |
ICICI Prudential Long Term Equity Fund (Tax Saving) | 4 | Aug-99 | 27.70% | 2.31% | 3582 |
IDFC Tax Advantage (ELSS) | 4 | Dec-08 | 26.92% | 2.48% | 465 |
It can be observed that the return generating capacity is independent of the fund size or expense ratio or the age of the fund or the analyst’s rating of the fund. Does the fund characteristic, irrespective whether it was targeted to be so by the fund management team influence the fund performance or it’s the result of the investment and stock picking process, have any bearing on the performance of the ELSS schemes? A simple statistical test was conducted to determine the same. A brief report with results is presented in the next section.
We have studied the ELSS schemes of largest 15 (in terms of AUM) AMCs, which gave us a sample of 19 funds. The objective was to determine if certain fund characteristics, namely, the age of the fund, portfolio turnover, size of the fund and the fund’s expense ratio, have any bearing on the scheme’s performance (as measured by the 3 year CAGR generated). The table-2below provides a detailed summary of the funds studied.
Fund | Launch Date | Age (in Years) | Portfolio Turnover | Net Assets (Rs. Cr) | Expense Ratio | 3-Year Return (%) |
Reliance Tax Saver Fund | Sep-05 | 10.99 | 36.00% | 5791 | 2.01% | 34.12% |
Axis Long Term Equity Fund | Dec-09 | 6.72 | 67.00% | 10290 | 1.98% | 30.80% |
Birla Sunlife Tax Relief 96 | Mar-96 | 20.48 | 5.00% | 2425 | 2.42% | 28.65% |
DSP Blackrock Tax Saver Fund | Jan-07 | 9.66 | 134.00% | 1416 | 2.53% | 28.26% |
Invesco India Tax Plan | Dec-06 | 9.72 | 24.00% | 332 | 2.47% | 28.09% |
Birla Sunlife Tax Plan | Feb-99 | 17.59 | 3.00% | 401 | 3.01% | 27.61% |
L & T Tax Saver Fund | Nov-05 | 10.83 | 3.00% | 29 | 2.67% | 27.05% |
Franklin India Tax shield Fund | Apr-99 | 17.44 | 26.00% | 2400 | 2.41% | 26.77% |
ICICI Prudential Long Term Equity Fund | Aug-99 | 17.08 | 152.00% | 3582 | 2.31% | 26.39% |
Tata India Tax Savings Fund | Mar-96 | 20.47 | 33.00% | 393 | 2.94% | 26.32% |
Kotak Tax Saver | Nov-05 | 10.82 | 21.00% | 509 | 2.45% | 26.22% |
IDFC Tax Advantage (ELSS) Fund | Dec-08 | 7.72 | 94.00% | 478 | 2.48% | 24.94% |
SBI Magnum Tax Gain | Mar-93 | 23.47 | 20.00% | 5003 | 2.01% | 24.14% |
Birla Sunlife Tax Savings Fund | Mar-04 | 12.47 | 11.00% | 25 | 3.01% | 24.10% |
Sundaram TaxSaver | Nov-99 | 16.82 | 50.00% | 1369 | 2.48% | 24.04% |
HDFC Tax Saver | Mar-96 | 20.52 | 55.00% | 5299 | 2.17% | 23.53% |
HDFC Long Term Advantage Fund | Jan-01 | 15.71 | 18.00% | 1249 | 2.35% | 23.19% |
L & T Tax Advantage Fund | Feb-06 | 10.55 | 30.00% | 1769 | 2.14% | 22.88% |
UTI Long Term Equity Fund | Dec-99 | 16.76 | 49.00% | 713 | 2.56% | 19.98% |
We found that age of the fund, in contrast to the popular belief, did not influence the fund performance at all. A fund like SBI Magnum Tax Gain which is almost 24 years old, has delivered a 3-year return of 24.14%, whereas the newest fund in the sample – Axis Long Term Equity Fund, which is just about 7 years old has given a return of 30.80%. Conversely, we will be wrong even if we conclude that newer the fund higher the return, as when funds like IDFC Tax Advantage (ELSS) Fund that is 8 years old has given a return of 25%, compared to a much older fund like Birla Sun life Tax Relief ’96, which is almost 20 years old, has given a return close to 29%. We just conclude that the age of the fund cannot be a criterion in selecting a fund, given the criteria of fund selection is return-generating capacity.
Portfolio turnover refers to the frequency of change in the portfolio structure of the fund. In simple words, it signifies how frequently the fund manager is buying and selling stocks within the fund. This is one criteria generally used to by cost conscious investors, as higher turnover may be leading to a higher expense ratio and thus affecting the NAV and also a higher turnover is a symbol of active fund managing style over a passive style. The debate is still on as to whether, in a market like India, an active management can deliver superior return over a passive style. We found that portfolio turnover do not impact the return generating capacity of the fund. Independent of the turnover percentage, the funds have performed uniquely. An example could be of ICICI Prudential Long Term Equity Fund whose turnover ratio is the highest (at 152%) and that has given a return of 26.39%, compared with funds like L&T Tax Saver and Birla Sun life Tax Plan, both of which had the lowest portfolio turnover (close to just 3%) have delivered returns in the range of 27-28%. Also, there is no homogeneity found among the funds in their turnover ratio, considering all of them belong to a similar theme of funds. We just conclude that portfolio turnover is not a criterion for investors in deciding on the potential of an ELSS in generating returns.
Does the higher size of the fund imply a better performance? Probably yes. At least as per our sample study. Axis Long Term Equity Fund and Reliance Ta
x Saver Fund are the two largest ELSS among the sample, which have given the highest returns also (31% and 34% respectively). But, the proposition does not hold if we remove these two funds from the sample. Funds with the lowest AUM like L & T Tax Saver Fund and Invesco India Tax Plan have given above-average return (above 26%), compared to higher sized funds like UTI Long Term Equity Fund, HDFC Long Term Advantage Fund and Sundaram Tax Saver that have delivered a below-average return. We conclude that fund size is a criterion that needs to be considered, but, it cannot be the primary criterion in selecting fund. In the fund selection process, one may have to use fund size tie breaker between two funds.
x Saver Fund are the two largest ELSS among the sample, which have given the highest returns also (31% and 34% respectively). But, the proposition does not hold if we remove these two funds from the sample. Funds with the lowest AUM like L & T Tax Saver Fund and Invesco India Tax Plan have given above-average return (above 26%), compared to higher sized funds like UTI Long Term Equity Fund, HDFC Long Term Advantage Fund and Sundaram Tax Saver that have delivered a below-average return. We conclude that fund size is a criterion that needs to be considered, but, it cannot be the primary criterion in selecting fund. In the fund selection process, one may have to use fund size tie breaker between two funds.
Another popularly used filtering criterion in selecting mutual funds, especially in case of ELSS is the fund’s expense ratio. Higher the expense ratio, it is assumed that fund management is actively managing the fund and may be the stock picks are not going right. We tried to see if higher expense ratio results in a varied performance in terms of 3-year return. Birla Sun life Tax Savings Fund had the highest expense ratio and has delivered a below-average performance, whereas Axis Long Term Equity Fund, which had the lowest expense ratio, delivered an above-average performance. The trend could actually be observed throughout, and thus we conclude based on the sample, that generally funds incurring high expenses tend to deliver lower returns. Fund selection process may have to consider expense ratio of the fund before selecting a fund.
To sum it up, ELSS need not be considered as mere tax saving instruments. They can as well be part of the portfolio beyond this reason. The size of the fund and the expense ratio are two criterions which may have to be considered before investing in a fund. A larger fund with lower expense ratio can any day be a better choice over the one their counterparts.