GEM GAZE 
November 2013

As a pure equity option, ELSS funds have long been investors' favourite as they combine the need to save tax with the possibility of higher returns owing to their exposure to equity. That they come with a lock-in of three years relieves the fund manager from redemption pressure for that time period. These funds provide an excellent alternative to other tax saving options under Section 80C like fixed deposits, national savings certificate, PPF, etc. Moreover, this is the only pure equity investment avenue available to the investors among the other fixed income options. Unlike other categories, the inflow in these funds is usually higher in the second half of the financial year as people tend to finalise their tax-saving investments as the financial year draws to a close. These funds have generated decent returns over a time period with the 10-year annualised return of 17.16% which is above the Sensex return of 15.61% for the same time period.

All the GEMs of the 2012 GEMGAZE have retained their GEM status in the 2013 GEMGAZE also save one – Sundaram Tax Saver - which has not been performing well for quite sometime now.

Magnum Taxgain Fund Gem
Refinement in process

 

SBI Magnum Taxgain is one of the oldest and largest tax-saving ELSS schemes in the country with an AUM of Rs 3,866 crore. Over the last few years, we have seen several changes take place that are steps in the right direction. On the process front, up until 2011 manager Jayesh Shroff freely took active positions versus the benchmark index S&P BSE 100 according to his convictions. However, the execution often left a lot to be desired. In addition, Shroff tended to overweight sectors wherein he had expertise, thereby, risking missing out on opportunities in other areas. However, since 2011, Shroff has been plying a benchmark-aligned growth-oriented approach in place of the erstwhile benchmark-agnostic process. According to the new strategy, the portfolio’s sector weights are loosely aligned with those of the S&P BSE 100 index (within the range of +/- 7 percentage points). This was a positive change that resulted in the process becoming more disciplined. The investment team, which has seen significant turnover in the past, is gradually gaining traction. An interesting feature of the fund is its stock picking which is more inclined to companies that have disproportionately large market share, with 71% of the funds in large cap stocks. There are 48 stocks in the portfolio, with the top 5 holdings accounting for 27.8% of the portfolio. The top three sectors that the fund invests in are finance, technology, and energy. One-year return of the fund is 6.05% as against the category average of 5.62 %. The expense ratio is 2.02% and the portfolio turnover ratio is 17%.


HDFC Tax Saver Fund Gem
Consistent reward to investors

At Rs 3095 crore, HDFC Tax Saver is the second largest ELSS fund in the industry. The fund is managed by Vinay Kulkarni, who is well-ingrained into the HDFC investment philosophy and has a reasonably strong track record. Kulkarni's focus on the long-term strength of a business is a positive and it complements his style of investing for the long haul. Kulkarni also takes large stock and sector bets, often against the grain. This is linked to the research-intensive approach and the caliber of the investment team, which helps pull off such a strategy. But Kulkarni's big bets can result in severe underperformance in the short term. His valuation consciousness also can hold back the fund versus peers when markets are rewarding speculative fare. The fund's poor performance in 2007 when stocks in overheated sectors such as power utilities, real estate, and metals were the season's flavour is a case in point. Nevertheless, over longer time frames when markets experience a cycle, the manager's investment style and expertise will hold the fund in good stead. Many tax saving funds have taken a deep cut in their NAV during bear markets, owing to their mid-cap focus. HDFC Tax Saver, though, has learnt from past lessons and has increased its large-cap exposure. Currently, large caps account for 62% of the portfolio. With 57 stocks and the top 5 holdings accounting for 30%, the fund looks well diversified. The top three sectors that the fund invests in are finance, technology, and energy. In the past one year, the fund has earned a return of 5.17% as against the category average of 5.62%. The expense ratio is 2.3% and turnover ratio is 37%. 

 Canara Robeco Equity Tax Saver Fund Gem

 Aggressive gamble?

Canara Robeco Equity Tax Saver’s focus on growth-oriented companies has made it stand out in the crowd. Going by its performance over the past five years, consistency is what stands out, whether in a bull market or a bear one. This Rs 560 crore fund has been pretty successful in utilising the agility that a small fund offers by spotting opportunities and capitalising on them. There are 58 stocks in the portfolio. Allocation to the top 5 holdings (29%) is in line with the category average. Over the past five years, energy, financial services and technology have been part of the top five sectors and the top three sectors are finance, technology, and energy, in that order. The fund has maintained a compact portfolio without compromising on diversification. The fund invests in companies with a strong competitive position in good businesses with a quality management. It has been among the top performers in the tax saving funds category and has delivered returns consistently across market cycles. It consistently beats its benchmark, irrespective of the timing of one's investment, making it a good addition to a core portfolio. Canara Robeco Equity Tax Saver has outperformed its category average four times in the past five years. Over one-, three- and five-year time periods, the fund has outperformed its benchmark – BSE 100. The level of outperformance has been to the tune of 2-8 percentage points. However, the frequent change in fund management in recent years is a cause of concern for investors. A large-cap focus and the ability to shift in and out of cash positions depending on market volatility has helped the fund tide over corrections and reasonably ride on rallies. One-year return is 5.25 % as against the category average of 5.62 %. The expense ratio is 2.65% and portfolio turnover ratio is 55%.  

Religare Invesco Tax Plan Gem
Potential to deliver

With a corpus size of Rs 128 crore, Religare Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. Religare Tax Plan seeks to invest in emerging mid-cap companies that have the visibility to grow through the economic cycles. However, being a tax plan with the mandated three-year lock-in period, it can afford to take these chances as the mid-cap theme is bound to play out over longer tenures. The scheme focuses on investment in niche businesses that are expected to grow in size, and allow these businesses time to grow. If this strategy increases the short-term risks, then the presence of blue-chips balances the portfolio's risk. As apparent from its performance track record, the fund’s forte is negotiating volatility and protecting investors from the downside. The fund’s competency in tackling volatility is further substantiated by its lower standard deviation of 23.1% as against the category average of 25.8% over a three-year period. Furthermore, the fund’s downside capture ratio during that period is also impressive. It captured only 72% of the downside of the category benchmark index (BSE 200), compared to a relatively higher 87% of the downside suffered by a typical peer fund. The fund invests across market capitalisation and sectors and spreads its assets over 49 stocks without being overly diversified and the top 5 holdings constitute 30%. The top three sectors are finance, technology, and energy. At present, large cap stocks make up 51% of the portfolio. The one-year return is 7.65% as against the category average of 5.62%. The expense ratio is 2.91% and the portfolio turnover ratio is 33%.

DSPBR Tax Saver Fund Gem

Risky reward

DSP Black Rock Tax Saver gets hit harder during bad times, but bounces back impressively in rallies. There was a change of guard at this fund’s helm in July 2012. Manager Anup Maheshwari relinquished portfolio management duties and Apoorva Shah took over. But, the investment process remains unchanged. The fund continues to follow a flexi-cap approach wherein the focus is to generate superior returns over a three-year period by moving across sectors and market caps in an unconstrained manner. The stock-picking is rooted to a bottom-up approach, where the main focus is on picking growth-styled stocks. There is a top-down overlay when taking sector bets, where the focus is on identifying sectors that demonstrate strong pricing power. The manager also pays heed to portfolio construction, with strong emphasis on liquidity and risk mitigation. DSPBR Tax Saver has a fund corpus of around Rs 684 crore. It has a growth-oriented multi cap portfolio with 63% of the corpus in large cap stocks. There are 80 stocks in the portfolio. The top 5 holdings constitute 21%. The top three sectors are finance, technology, and energy. DSP BR Tax Saver fund has offered 8.64% returns for the last one year as against the category average of 5.62%. The expense ratio is 2.62% and the portfolio turnover ratio is 58%.