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ELSS Picks December 21, 2012
Preferred picks - Consistent Performing ELSS Schemes:
.
Note: NAV values are as on December 19, 2012. Preferred picks arrived based on the 3 year and 5 year rolling returns calculated for last 6 years period.
Advantages of investing in ELSS Schemes:
• Equity Linked Savings Schemes (ELSS) offer multiple advantages of providing equity returns along with tax
benefit on investment in a short lock in period of 3 years. The lock-in period applicable to ELSS is 3 years,
while it is 6 years in the case of National Savings Certificates and 15 years in the case of PPF. Opting for the
dividend option in the ELSS allows investors to realise some gains even during the lock-in period.
• Equity Linked Saving Schemes (ELSS) are mutual fund schemes providing tax benefit to the investors for
investments up to overall limit of Rs. 1,00,000 under Section 80 C of the Income tax Act. Investors get a
deduction of the amount invested from their taxable income. The tax payer straightaway saves to the
extent of tax applicable on the invested amount. Hence depending on the applicable tax rate, the returns
earned can be calculated on the net-of-tax-benefit investment and hence are superior.
• ELSS are equity linked products which allow investors to participate in equity markets and provide higher
return potential (on the flip side, risk is also higher but the tax benefit acts as a buffer).
• Since the investments in equity over long-term delivers better returns, the lock-in period of 3 years allows
the fund managers of ELSS to build a portfolio for the long term without worrying about early redemptions.
This helps the investors to boost their wealth to achieve their long term goals.
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ELSS Picks contd…
Prologue: Among the many tax saving options, investment in ELSS is considered as one of the better options as
they provide better returns along with tax benefit and with a short lock in period of 3 years. Equity Linked Saving
Schemes (ELSS) are mutual fund schemes providing tax benefit to the investors for investments up to overall limit
of Rs. 1,00,000 under Section 80 C of the Income tax Act.
Some of other options that one can invest in to avail section 80C benefits (within the overall limit of Rs. 1,00,000)
are Employees provident fund (EPF), Public Provident Fund (PPF), Five-year fixed deposits with Banks, National
.
Savings Certificate (NSC), Life insurance premiums, Pension policy premium, Senior Citizens Savings Scheme etc.
ELSS are equity-diversified schemes which invest primarily in equity and equity related instruments across market
capitalization. They have a lock in period of 3 years and hence eligible for tax benefit. Investors cannot redeem
the units that have been invested in the ELSS schemes before end of 3 years.
The top performing tax planning schemes have managed to deliver good returns over the long run compared to
other tax saving options available for investments.
Currently, there are 49 ELSS schemes in the market, out of which 37 are open ended and 12 are close ended
schemes.
The category comprises 3.2% of industry AUM as on November 30, 2012, worth Rs. 22,521 crore out of Rs. 7,93,152
crore of industry AUM (AMFI monthly data) and 12% of the total equity AUM of Rs. 1,87,607 crore.
Comparison of some of investment products qualifying under Section 80C:
*** - Category average rolling return.
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ELSS Picks contd…
Benefits of investing in ELSS:
By investing in ELSS schemes, an investor can get benefits like tax saving, decent returns and option to invest for a
longer period.
Tax Benefit: An investor attains tax benefit for the amount invested into the ELSS schemes since investments up to
Rs. 1,00,000 are eligible for deduction from the gross total income under Section 80 C of the Income tax Act.
For example, an investor who has earned an income of Rs. 5,00,000 for the financial year invests Rs. 1,00,000 in an
.
ELSS. The taxable income in this case (for 10% tax slab) would come down by Rs. 1,00,000 to Rs. 4,00,000. In this
way he will save tax of Rs.10,000 + surcharge/cess. The savings for investors who fall in higher slabs (30% tax slab)
is higher (taxable income over Rs.8 lakhs) where they could save about Rs.30,000 + surcharge/cess.
Dividends that are declared by ELSS are currently tax-free in the hands of investors.
Freedom to Fund Manager to invest without redemption pressure: As the amount invested in ELSS is meant to be
locked in for 3 years, the fund manager of the scheme has the leeway to take calls without having any redemption
pressure. He may take calls on companies where he believes that there is potential for value to be unlocked in the
medium to longer term.
Investing through SIP mode: Investing through the staggered investment mode like Systematic Investment Plan
(SIP) in such schemes helps to invest in disciplined manner creating a good corpus over time to earn decent returns
in future. The SIP option helps start tax planning from the beginning of the financial year. But investors have to
keep in mind that every SIP installment is meant to be locked in for 3 years.
Basic Details of ELSS: There are no entry and exit loads charged to invest in ELSS schemes. Investors are given
three options to invest including growth, dividend payout and dividend reinvestment option. Growth option
enables to compound benefits to build up substantial wealth over time while the dividend option allow the
investors to earn tax-free dividends periodically. Considering Dividend Re-investment option, each re-investment
will be treated as a fresh investment and will be locked in for another 3 years. Hence Dividend Reinvestment
option is not recommended. Further, one can invest in an ELSS with as little as Rs 500, unlike the other equity
oriented funds, which generally seek Rs 5,000 as the minimum investment amount.
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ELSS Picks contd…
Comparison of Asset weighted average returns of equity oriented categories with top performing ELSS:
.
Note: Weighted returns (in proportion to corpus) are trailing & up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on December 19, 2012.
The above table portrays the relative performance of ELSS category with other equity oriented mutual fund
categories over different time frames.
It is worth noting that the ELSS category has been neither a top performer nor a bottom performer in any of the
time frames or market cycles. It has been average performer most of the periods as most of the schemes are large
cap oriented multi-cap schemes which failed to participate in the recent rally by the mid-cap stocks.
Even though the ELSS category underperformed Equity diversified categories, the top performing schemes from the
ELSS category outperformed most of other equity oriented schemes over the both short term as well as long term
periods.
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ELSS Picks contd…
Our preferred picks:
We arrived the picks based on the relative performance of 3 year and 5 year rolling returns that are calculated for
last six years period. Our preferred picks are Canara Robeco Equity - Tax Saver, ICICI Pru Tax Plan and HDFC
Tax Saver Fund. They delivered above average performance in all the market cycles such as Bull Run, Bear Run
and volatile periods.
Investments through SIP:
.
Investments which are done through Systematic Investment Plan have grown firmly and given significantly higher
returns over the longer term. Investors can prefer monthly or quarterly frequency to invest in ELSS schemes given
the current market condition. SIP works well across market cycles and helps to average out the cost of investment
that are done in different periods.
The following table depicts the return earned by resorting to monthly SIP in ELSS scheme over the past three years
in the top 3 ELSS schemes.
SIP & Lump sum performance by top performing schemes from ELSS category:
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ELSS Picks contd…
I. Canara Robeco Equity - Tax Saver:
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ELSS Picks contd…
Contd…….. Canara Robeco Equity - Tax Saver
Yearly Returns over periods: Allocation into Market Capitalisations:
120 C a na ra R o be c o E quit y - T a x S a v e r C a t e go ry A v e ra ge La rge c a p M idc a p S m a llc a p
80 100%
40 80%
60%
.
0
40%
-40
20%
-80
0%
Mar-10
Mar-11
Mar-12
Sep-09
Dec-09
Jun-10
Sep-10
Dec-10
Jun-11
Sep-11
Dec-11
Jun-12
Sep-12
2005 2006 2007 2008 2009 2010 2011
Canara Robeco Equity - Tax Saver has been the best performing scheme from Though the scheme adapts to multi-cap orientation on stock picking, it prefers to
ELSS category. The scheme continuously outperformed its category and hold maximum assets into large-cap stocks. However, its best performance is
benchmark for years. The performance during various market cycles is also mainly attributable to the right balance maintained between Large cap and
commendable. It showed better performance during markets rallies compared midcap stocks. The scheme was fully invested in the recent periods into equities
to peers thanks to its stock picking ability. and is all set to benefit from the recent rally in the equity market. The better
cash strategy taken during recession helped the scheme to out perform the peers
over periods.
Performance during various market cycles: Cash call Vs. Equity Market Movement:
300 Canara Ro beco Equity - Tax Saver B SE 100 16 Cash (%) (LHS) Sensex (RHS) 22000
250 ELSS Catego ry Equity Diversified Catego ry 14 21000
200 12 20000
150 10
19000
100 8
50 18000
6
0 17000
4
-50 16000
2
-100
0 15000
June '06 to Jan '08 Jan '08 to Mar '09 Mar '09 to Nov '10 Nov '10 to till date
Sep-09
Nov-09
Jan-10
Sep-10
Nov-10
Jan-11
Sep-11
Nov-11
Jan-12
Sep-12
Nov-12
Mar-10
May-10
Jul-10
Mar-11
May-11
Jul-11
Mar-12
May-12
Jul-12
(Bull Run I) (Bear Run ) (Bull Run II) (Volatile Period)
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ELSS Picks contd…
II. ICICI Pru Tax Plan:
.
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ELSS Picks contd…
Contd…….. ICICI Pru Tax Plan
Yearly Returns over periods: Allocation into Market Capitalisations:
160 La rge c a p M idc a p S m a llc a p
IC IC I P ru T a x P la n C a t e go ry A v e ra ge
120
100%
80
80%
40
60%
0
.
40%
-40
20%
-80
0%
Mar-10
Mar-11
Mar-12
Sep-09
Dec-09
Jun-10
Sep-10
Dec-10
Jun-11
Sep-11
Dec-11
Jun-12
Sep-12
2005 2006 2007 2008 2009 2010 2011
ICICI Pru Tax Plan is an above average performer within this category. Its The fund manager follows growth style of investing with a blended portfolio of
consistency of generating higher risk adjusted returns over long term is notable. large, mid and small cap stocks. However, the recent portfolios show that he
The scheme witnessed outperformance in the market upturns thanks to prefers to invest predominantly in large cap stocks. As far as cash strategy is
considerable allocation into mid and smallcap stocks historically . That was also concerned, the scheme is meant for higher churning as the higher turnover ratio
the reason of underperforming during market correction (see below chart during of 205% proves the same.
bear run).
Performance during various market cycles: Cash call Vs. Equity Market Movement:
300 ICICI P ru Tax S&P CNX 500 14 Cash (%) (LHS) Sensex (RHS) 22000
250 ELSS Catego ry Equity Diversified Catego ry
12 21000
200
10 20000
150
100 8 19000
50 6 18000
0 4 17000
-50
2 16000
-100
0 15000
June '06 to Jan '08 Jan '08 to Mar '09 Mar '09 to Nov '10 Nov '10 to till date
Sep-09
Nov-09
Jan-10
Sep-10
Nov-10
Jan-11
Sep-11
Nov-11
Jan-12
Sep-12
Nov-12
Mar-10
May-10
Jul-10
Mar-11
May-11
Jul-11
Mar-12
May-12
Jul-12
(Bull Run I) (Bear Run ) (Bull Run II) (Volatile Period)
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ELSS Picks contd…
III. HDFC Tax Saver Fund:
.
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ELSS Picks contd…
Contd…….. HDFC Tax Saver Fund
Yearly Returns over periods: Allocation into Market Capitalisations:
120 H D F C T ax Saver C a t e go ry A v e ra ge La rge c a p M idc a p S m a llc a p
80 100%
40 80%
60%
.
0
40%
-40
20%
-80
0%
Mar-10
Mar-11
Mar-12
Sep-09
Dec-09
Jun-10
Sep-10
Dec-10
Jun-11
Sep-11
Dec-11
Jun-12
Sep-12
2005 2006 2007 2008 2009 2010 2011
HDFC Tax Saver Fund is a another consistent performer from the ELSS category. The scheme follows a balanced approach of maintaining the assets between
The scheme outperformed its peers and benchmark most of the time in the past large cap and midcap stocks. The portfolio of the scheme held an average of
thanks to quality stocks. The scheme takes top down approach with no bias 35% of equity assets into midcap stocks. The scheme churns its portfolio less as
towards any market cap. This helped to catch the initial leg of the market rally the turnover ratio of 21% proves the same. The scheme was fully invested into
and appreciates assets faster than the peers. However, the underperformance equities to attain the benefit from the current equity market rally.
during downturn was more due to considerable allocation into midcap stocks.
Performance during various market cycles: Cash call Vs. Equity Market Movement:
300 HDFC Tax Saver S&P CNX 500 20 Cash (%) (LHS) Sensex (RHS) 22000
250 ELSS Catego ry Equity Diversified Catego ry 18 21000
200
16
14 20000
150
12 19000
100 10
18000
50 8
0 6 17000
-50
4
16000
2
-100
0 15000
June '06 to Jan '08 Jan '08 to Mar '09 Mar '09 to Nov '10 Nov '10 to till date
Sep-09
Nov-09
Jan-10
Sep-10
Nov-10
Jan-11
Sep-11
Nov-11
Jan-12
Sep-12
Nov-12
Mar-10
May-10
Jul-10
Mar-11
May-11
Jul-11
Mar-12
May-12
Jul-12
(Bull Run I) (Bear Run ) (Bull Run II) (Volatile Period)
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ELSS Picks contd…
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Analyst: Dhuraivel Gunasekaran.
HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station,
Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435
Disclaimer: Mutual Fund investments are subject to risk. Past performance is no guarantee for future performance. This document has been
prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or
copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The
information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied
upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-
Institutional Clients.
ELSS Picks Retail Research