Equity linked saving schemes, ELSS, became popular because they saved you taxes. Now the same ELSS funds have shown that investors can make money as well.
The reason we recommend ELSS over other tax-saving avenues is because their benefits are tremendous. To know more about these benefits read Tax planning for 2007-08.
Here is a brief analysis of four of the best funds in the category.
Birla Equity Plan -- Definitely worth a look
Rating: 4 stars
Birla Equity Plan has come a long way since inception to emerge as a category-beating fund. Barring one year, the fund has consistently beaten the category returns over the past five years.
The fund manager churns the portfolio quite aggressively. He moves swiftly in and out of sectors spotting opportunities and strategically timing his entry and exit. Good stock picks have, in fact, become the USP of the fund.
For instance, picks such as Automobile Corporation of Goa have delivered significant returns for the fund at a time when the auto sector has been in the grip of bears.
In fact, the fund has maintained its position in the automobile sector at a high of 13 per cent through this bear phase while the average category exposure to the sector has hovered around 7 per cent.
The fund has displayed an uncanny ability to sense an opportunity at the right time. It did so during the third quarter of 2006 by timing its entry in the banking stocks to perfection.
Another refreshing difference in the portfolio is the lower than average allocation to the technology sector.
In spite of such a churn, the volatility in returns is below average. The fund manager prefers to hold a small portfolio of around 35 stocks in which he invests with conviction. So far 2007 looks good for the fund -- the year to date return as on June 8 (8 per cent) is way ahead of the category average (4.11 per cent).
Those of you who have a tech heavy portfolio and are looking for a tax-planning fund to balance such a discrepancy can definitely look at Birla Equity Plan.
HDFC Taxsaver -- Keep a close watch
Rating: 5 stars
HDFC Taxsaver continues to retain its top slot on the ratings ladder. Such has been the dominance of this fund that its star rating has never gone below four stars in its rating history of 96 months.
The fund has always been held in high regard, as far as the category of tax-planning funds is concerned. Not only has it generated superior returns for its investors, but it has also shown resilience while protecting the downside time and again.
However, its image of being a wealth protector has taken a dent in the recent times.
In fact, it has been in the thick of action over the past few months. Vinay Kulkarni took over as fund manager from Dhawal Mehta in the last quarter of 2006. The initial phase proved to be quite rough for the new manager, as the markets dipped in the first quarter of 2007.
During this time period, the fund lost 8.62 per cent vis-à-vis an average peer's loss of 6.45 per cent. Certain changes are visible in the fund's portfolio. The new manager is reducing the level of concentration in the portfolio, as the number of holdings has gone up from earlier 30-35 stocks to over 45 currently.
Among the sectors, the new manager has significantly cut exposure to auto and construction stocks, while building notable positions in sectors like energy, banking and services.
All these developments suggest that investors need to be more watchful here. The transition to the new fund manager has not been all that great so far, but it could be a mere aberration and nothing conclusively can be said over such a short period of time. Therefore, its performance needs to be gauged more closely over the coming months.
ICICI Pru Taxplan -- High risk, high reward
Rating: 4 stars
The charm of this fund lies in its ability to generate trail-blazing returns. But it won't go down well with investors who prefer stability to high returns. The fund's high-risk high-return strategy is evident in its performance record.
During the first quarter of 2007, when equity markets were in a spot of bother, this one lost massively (-10.92 per cent), far high than the category's loss of 6.45 per cent.
Indian stock markets have witnessed increased volatility over the last one-year, and ICICI Pru Tax Plan has found the going quite tough, as it has been ranked 25 (out of 26). But increase your time horizon to three years, and the fund is placed among the top performers: with annualised returns of over 53 per cent, it sits pretty at the third rank.
What adds to the risk of this fund is the kind of portfolio it holds. It invests aggressively in the stocks of small-sized companies. The combined allocation to mid and small caps has averaged 87 per cent of the assets in the last one year. But of late, the fund has increased its allocation to large caps to over 22 per cent (from under 10 per cent earlier) to tone down its aggression a bit.
The fund is not only aggressive in selecting stocks but also tends to churn its portfolio quite frequently. The fund manager loves to try out stocks but the buy-and-hold strategy does not seem to be his priority. But it spreads its portfolio across over 50 stocks to partially mitigate the risks that come with investing in scrips of smaller companies.
In a nutshell, this fund has the calibre to reward you well but it will definitely test your nerves. Therefore, invest in it only if the ups and downs of the stock markets do not bother you much.
Magnum Taxgain -- Has trimmed exposure to small caps
Rating: 5 stars
This fund has made its investors proud. It has been ranked first for three consecutive years from 2004-2006. And along the way the fund has matured in its fund management.
Of late, it has shown an ability to efficiently manage market crashes. In the quarter of June 2006 the fund lost just 11 per cent compared with the category's loss of 15.35 per cent and again in the first quarter of 2007 (January - March) it lost only 4.06 per cent compared to the 6.45 per cent drop in the category.
Historically, the fund has been known to lose more than the category in bearish markets.
There have been some changes in the portfolio from the last time we visited it. Since January this year the fund has been consciously reducing its exposure to technology and construction stocks. In fact, the concentration of technology holdings has also reduced, with more stocks being picked.
There have been other developments that have reduced the amount of risk assumed by the fund. Since 2006, the fund has substituted its small cap holdings in favour of large cap stocks. The fund has, however, not altered its allocation to mid cap stocks.
