The new Budget proposals mean that you no longer have to worry about which instrument to invest in and what tax breaks it offers, because tax benefits are more or less uniform now. In such a scenario it makes sense to invest in schemes that will offer you the best returns.
That is, if you are ready to take a bit of risk. This is where equity-linked tax-saving schemes (ELSSs) come into the picture as a profitable investment option.
According to Hemant Rustagi, chief executive of Mumbai-based financial advisory firm Wiseinvest Advisors, the proposed tax changes will make mutual fund tax-saving schemes more attractive.
"With investments up to Rs 1 lakh (Rs 100,000) exempt from tax, investors whose risk profile is high can take a higher exposure to ELSSs," says Rustagi.
ELSSs currently offer a tax rebate (as per the slabs applicable to your income) on investments up to Rs 10,000 under section 88. Now there will be no caps.
| How ELSSs fared (Returns in %) | |||
| Scheme | 1 yr | 3 yrs | 5 yrs |
| Magnum Taxgain | 82.15 | 57.29 | -3.32 |
| Prudential ICICI Tax Plan | 79.34 | 53.75 | 13.30 |
| Sundaram Tax Saver | 66.93 | 45.27 | 14.01 |
| HDFC Tax Saver | 65.33 | 51.44 | 25.04 |
| Libra Taxshield '96 | 61.32 | 43.36 | 0.34 |
| HDFC Long Term Advantage | 52.85 | 61.16 |
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| Principal Tax Savings | 40.47 | 41.94 | 12.00 |
| Franklin India Taxshield | 35.21 | 40.09 | 14.36 |
| Tata Tax Saving | 34.75 | 47.50 | 3.62 |
| Birla Equity Plan | 33.65 | 53.82 | 6.33 |
ELSSs also enjoy certain advantages vis-a-vis normal growth schemes. These schemes require a lock-in period of three years. This allows the fund manager to invest in stocks
Prudential ICICI Tax Plan
Latest NAV: Rs 48.01
Corpus: Rs 53.10 crore
The fund has been among the most consistent performers in the ELSS category. While it ranks second in terms of returns for the past one year at 79.34 per cent, it has done even better over longer tenures.
For the three-year period the scheme has managed a return of 53.75 per cent and is also one among the six schemes to have generated double-digit returns over the five-year period.
The fund actively churned its portfolio in the past year and added a lot of mid-caps, including Ballarpur Industries, Blue Dart, BOC India and Crompton Greaves. It also booked profits in scrips like KPIT Cummins, Uniphos Enterprises, Finolex Industries and Karnataka Bank.
Due to the fact that the fund manager takes all his big bets in the mid- and small-cap segment the performance of the fund tends to be volatile. But as its performance shows, the fund has been getting most of its calls right.
HDFC Tax Saver
Latest NAV: Rs 68
Corpus: Rs 40.29 crore
The fund has managed to beat its peer group over the years. By far it has given the best returns among all tax-saving schemes over the past five years at 25.04 per cent. Its returns since inception in March 1996 are an impressive 41.62 per cent. The fund managed to more than stay afloat even during the bear run of 2000 and 2001.
The next best return of 14.36 per cent was managed by Franklin India Taxshield scheme. Not that HDFC Tax Saver's recent performance has been any less. It has been in the list of top five performers for the three-year (51.44 per cent) and one-year (65.33 per cent) periods, too.
The fund has been hiking its exposure to mid- and small-cap segments in order to ensure greater growth. Over the past year, it added scrips such as Balkrishna Industries, Carborundum Universal and Container Corporation and moved out of large-caps such as HLL, HPCL and Maruti Udyog.
Franklin India Taxshield
Latest NAV: Rs 69.97
Corpus: Rs 129.22 crore
Franklin India Taxshield has one of the largest assets under management among all ELSSs. It is a middle-of-the-table performer in the one-year return (35.21 per cent) stakes.
However, that could be attributed to the fact that the fund has religiously stuck to its large-cap holdings and has not been taken in by the temptation to increase exposure to small- and mid-caps.
Additions to the fund's portfolio in the past year include TCS, NTPC, Dr Reddy's, ACC, Bhel and BPCL while scrips such as MphasiS BFL, E-Serve International, Wockhardt and Sun Pharma were pushed out.
In the past month, the scheme's exposure to the tobacco and pharmaceutical sectors has also decreased, while that to shipping and technology has gone up. Returns since launch in April 1999 stand at 39.07 per cent.
Sundaram Taxsaver
Latest NAV: Rs 13.80
Corpus: Rs 9.18 crore
Though relatively small in size, Sundaram Taxsaver is a consistent performer. It has beaten peers over various time periods. Sundaram Taxsaver is ranked third in the one-year return stakes at 66.93 per cent. It has given a return of 45.27 per cent and 14.01 per cent for the three-year and five-year periods.
The fund has exposure to a lot of stocks in the mid-cap segment which makes it one of the most volatile in its category. Over the past year, it has added companies such as Bajaj Hindustan, Balrampur Chini and Britannia Industries and removed Apollo Hospitals, Bajaj Auto, Tata Coffee and Corporation Bank from its portfolio.
Principal Tax Savings
Latest NAV: Rs 39.26
Corpus: Rs 94.07 crore
Even though the fund has taken some unusual exposures (Gujarat Alkalies & Chemicals, Blue Dart Express and Jaiprakash Associates are its top three holdings), it doesn't have more than 5 per cent exposure in any of these stocks.
While this diversification alleviates risk to an extent, it also enables the fund to cash in on the growth of the companies it invests in. The fund ranks among the top 10 ELSSs for all the three time periods under consideration.
Its returns are 40.47 per cent, 41.94 per cent and 12 per cent for one, three and five years respectively. The fund added Bongaigaon Refinery, Chambal Fertilisers and Gujarat Alkalies and Chemicals to its portfolio but pared exposure to Canara Bank, Tata Motors, Maruti Udyog and ICICI Bank.
Franklin India Index Fund
Latest NAV: Rs 16.34
Corpus: Rs 3.04 crore For risk-averse investors, Franklin India Index fund may be worth a look. This is an ELSS fund, but has the same philosophy of a regular index fund.
While the fund lags behind its peers, the fact that at least you are ensured as much return as the benchmark index (S&P CNX Nifty, in this case) should be a comforting thought. Investing in index funds also guards you from any wrong calls that fund managers make in other funds.