HDFC TaxSaver

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An Equity-linked Savings Scheme (ELSS) has a compulsory lock-in period of three years. So,you cannot switch before that. Moreover, if you do not intend to invest in mutual funds savingtax, which otherwise is a beneficial proposition, avoid opting for ELSS. Instead, invest in equitydiversified funds like HDFC Top 200, Magnum Contra or DSPBR Top 100 Equity.

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I am invested in Sundaram BNP Paribas Capex Opportunities Fund since November, 2007.

Its returns are in negative, should I exit? 

-Manohar Rao 

Sundaram BNP Paribas Capex Opportunities Fund is a 4-star rated sectoral fund. It mainly

invests in capital goods sector. It has been in the red (minus 10.03 per cent) from November2007 to February 11, 2010. In 2007, the performance was at its peak. But, in the 2008 downturn,it could not beat its category average. Since then, it seems to be on a recovery mode. If this is theonly fund in your portfolio, you must think of getting out. Instead of a sectoral fund, consider aconsistent performing equity diversified fund like HDFC Top 200, or DSPBR Equity.

What are the advantages of investing in debt funds, when the returns they give are justaround eight per cent or less? I believe the same can be attained by investing in a normal

fixed deposit (FD). 

-Jagadeesh Kumar 

Kanakala FDs are safer investments instruments because the return is guaranteed. But, the mainreason to prefer debt funds over FDs is the tax treatment of gains and income. Any gain orincome on FD investment is added to the investor's income and taxed accordingly, irrespective of the investment tenure. So if you are in a higher tax bracket, it works much to your disadvantage.

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In case of debt funds, the tenure matters. The gains get added to the income if the fund isredeemed within a year of investment. Any redemption after a year attracts a long-term capitalgains tax of 11.33 per cent (without indexation) or 22.66 per cent (with indexation). It is worth tonoting that the government levies a Dividend Distribution Tax (DDT) on debt funds, which isborne by the fund house (but ultimately passed on to the investor). This is 14.16 per cent of the

dividend declared. Nevertheless, investors benefits by opting for a debt fund for a period of morethan one year.

I am planning to invest Rs 2,000 via monthly systematic investment plan (SIP). For this, I

am considering HDFC Top 200, Reliance Growth, Reliance Vision and Sundaram BNPParibas Growth Reg. Help me choose suitably. 

-Srikanth 

All the above mentioned funds are equity diversified funds. While HDFC Top 200 and Reliance

Growth have been consistent good performers for the past few years, we have some reservationson Reliance Vision and Sundaram BNP Paribas Growth Reg (both rated 3-star). While theformer has been an average large-cap fund, the latter had been a poor performer lately, laggingthe category average in both, bear and bull markets.

We suggest you either increase the SIP amount in the first two funds or include one more fund,may be, DSPBR Top 100 or Birla Sun Life Frontline Equity.

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ELSS Mutual Fund Options

I wrote a post on how to find tax saving mutual funds some time ago, and I used that informationto get a list of all the ELSS mutual funds currently available in India, and then narrow downoptions from there.

Then I looked at the funds that were around for 5 or more years, and took the 10 best performingout of them.

After that I noted their expense ratio, as well as their inception date in the table below. Doing thisgave me a list that has some tax saving funds that have been around for a very long period, andhave done reasonably well over that period. The expenses are important because they eat up yourreturns, so I wanted to highlight them as well.

The limitation with this list is that it doesn’t contain any mutual funds that have been around for 

less than 5 years even if they performed well. For example – DSP Blackrock is a ELSS mutual

fund that has been around for about 4 years, has done well during that time, but is missing fromthis list.

Name  InceptionDate 

5 yearreturns 

ExpenseRatio 

Birla Sun LifeTax Relief  – 96

March 1996 16.57% 1.96

Canara RobecoCan Equity TaxSaver

March 1993 22.31% 2.38

HDFC TaxSaver

March 1996 17.80% 1.86

ICICIPrudential TaxPlan

August 1999 15.48% 1.98

SBI MagnumTax GainScheme – 93

March 1993 16.32% 1.78

PrincipalPersonal Tax

Saver

March 1996 16.42% 2.19

Franklin IndiaTax Shield

April 1999 17.34% 2.10

Sundaram TaxSaver

Nov 1999 17.73% 1.96

Sahara TaxGain

March 1997 22.31% 2.50

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Reliance TaxSaver

August 2005 15.14% 1.88

This list is not sorted in any particular order, and that’s deliberate because as soon as you sort

something your brain tends to think of it as best to worst from top to bottom, but that’s not the

case.

For mutual funds – the best mutual fund is the one that will give you the maximum return foryour holding period, but since that’s in the future, there is no way to really predict which one will

do better than the rest.

In the absence of that I compiled a list of long standing performers, and have presented you withthat information, and if you think this criteria makes sense, then you can select one or two fundsfrom this list for your investment.

HDFC TaxSaver (ELSS)

Investment ObjectiveThe investment objective of the Scheme is to achieve long term growth of capital.

Basic Scheme Information

Nature of Scheme Open Ended Equity Linked Savings Scheme with a lock-in

period of 3 yearsInception Date  December 18, 1995

Option/Plan Dividend Option,Growth Option. The Dividend Option offersDividend Payout and Reinvestment Facility.

Entry Load(For Lumpsum Purchases andinvestments through SIP/STP)

NILUnfront commission shall be paid directly by the investor tothe ARN Holder (AMFI registered Distributor) based on theinvestors' assessment of various factors including the servicerendered by the ARN Holder.

Please click here to go through the addendum.

Exit Load(as a % of the Applicable NAV) 

NIL No Exit Load shall be levied on bonus units and units allottedon dividend reinvestment.

Minimum Application Amount (click here for SIP Details)

For new & existing investors :Rs.500 and in multiplesthereafter.

Lock-In-Period  3 Years from the date of allotment of the respective Units.Net Asset Value Periodicity  Every Business Day.Redemption Proceeds  Normally dispatched within 3-4 Business days

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Tax Benefits(As per present Laws) 

Please click for details  

Current Expense Ratio (#)

(Effective Date 22nd May 2009) 

On the first 100 crores average weekly net assets 2.50%On the next 300 crores average weekly net assets 2.25%On the next 300 crores average weekly net assets 2.00%On the balance of the assets 1.75%

(#) Any change in the expense ratio will be updated within two working days.

Plan Name NAV Date NAV AmountDividend Option 11 Mar 2012 -Growth Option 11 Mar 2012 -TOP Investment PatternThe asset allocation under the respective Plans will be as follows :

Sr.No. Asset Type (% Of Portfolio) Risk Profile1 Equities & Equity related instruments Minimum 80% Medium to High

2 Debt Securities, Money Marketinstruments(including cash/call money)

Maximum 20% Low to Medium

Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of thescheme.

The Scheme may also invest upto 25% of net assets of the Scheme in derivatives such as Futures& Options and such other derivative instruments as may be introduced from time to time for thepurpose of hedging and portfolio balancing and and other uses as may be permitted under theregulations and guidelines.

The Scheme may also invest a part of its corpus, not exceeding 40% of its net assets, in overseasmarkets in Global Depository Receipts (GDRs), ADRs, overseas equity, bonds and mutual fundsand such other instruments as may be allowed under the Regulations from time to time.

Subject to the Regulations and the applicable guidelines, the Scheme may, engage in Stock Lending activities. Also refer to Section on Stock Lending by the Fund.

The ELSS (Equity Linked Savings Scheme) guidelines, as applicable, would be adhered to in themanagement of this Fund.

If the investment in equities and related instruments falls below 80% of the portfolio of the

Scheme at any point in time, it would be endeavoured to review and rebalance the composition.

Notwithstanding anything stated above, subject to the regulations, the asset allocation patternindicated above may change from time to time, keeping in view market conditions, marketopportunities, applicable regulations and political and economic factors. It may be clearlyunderstood that the percentages stated above are only indicative and are not absolute and thatthey can vary substantially depending upon the perception of the AMC, the intention being at alltimes to seek to protect the NAV of the scheme. Such changes will be for short term and

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defensive considerations.

Provided further and subject to the above, any change in the asset allocation affecting theinvestment profile of the Scheme and amounting to a change in the Fundamental Attributes of the Scheme shall be effected in accordance with sub-regulation (15A) of regulation 18 of SEBI

regulations.TOP Investment Strategy

Debt securities (in the form of non-convertible debentures, bonds, secured premium notes, zerointerest bonds, deep discount bonds, floating rate bond / notes, securitised debt, pass throughcertificates, asset backed securities, mortgage backed securities and any other domestic fixedincome securities including structured obligations etc.) include, but are not limited to :

  Debt obligations of the Government of India, State and local Governments, GovernmentAgencies and statutory bodies (which may or may not carry a state / central government

guarantee),  Securities that have been guaranteed by Government of India and State Governments,  Securities issued by Corporate Entities (Public / Private sector undertakings),  Securities issued by Public / Private sector banks and development financial institutions.

Money Market Instruments include :

  Commercial papers  Commercial bills  Treasury bills 

Government securities having an unexpired maturity upto one year  Collateralised Borrowing & Lending Obligations (CBLO)  Certificate of deposit  Usance bills  Permitted securities under a repo / reverse repo agreement  Any other like instruments as may be permitted by RBI / SEBI from time to time

Investments will be made through secondary market purchases, initial public offers, other publicoffers, placements and right offers (including renunciation). The securities could be listed,unlisted, privately placed, secured / unsecured, rated / unrated of any maturity. The AMC retainsthe flexibility to invest across all the securities / instruments in debt and money market.Investments made from the net assets of the Scheme would be in accordance with the features of the Scheme and the provisions of the SEBI Regulations. The AMC will strive to assess risk of the potential investment in terms of credit risk, interest rate risk and liquidity risk. The credit risk analysis would involve an assessment of the past track record and prospects for the company, theindustry it operates in, the future cash flows from operations and the requirement for additionalcapital expenditure. An interest rate scenario analysis would be performed on an ongoing basis,considering the impact of the developments on the macro-economic front and the demand and

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supply of funds.

Based on the above analysis, the AMC would manage the investments of the Scheme on adynamic basis to exploit emerging opportunities in the investment universe and manage risks atall points in time. The AMC will utilise ratings of rating agencies registered with SEBI as an

input in the decision making process. Investments in bonds and debentures will usually be ininstruments that have been assigned high investment grade ratings by a rating agency registeredwith SEBI. Pursuant to SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000, theAMC may constitute committee(s) to approve proposals for investments in unrated debtinstruments. The AMC Board and the Trustee shall approve the detailed parameters for suchinvestments. The details of such investments would be communicated by the AMC to the Trusteein their periodical reports. It would also be clearly mentioned in the reports, how the parametershave been complied with. However, in case any unrated debt security does not fall under theparameters, the prior approval of Board of AMC and Trustee shall be sought. The AMC willattempt to reduce liquidity risk by investing in securities that would result in a staggered maturityprofile of the portfolio, investment in structured securities that provide easy liquidity and

securities that have reasonable secondary market activity. In the event of a requirement toliquidate all or a substantial part of these investments in a very short duration of time, the AMCmay not be able to realize the full value of these securities to an adverse impact on the Net AssetValue of the Scheme.

INVESTMENT POLICIES Consistent with the investment objectives of the scheme, the AMC aims to identify securitieswhich offer superior levels of yield at low levels of risk. The investment team of the AMC willcarry out an internal credit analysis of all securities included in the investment universe. TheScheme may also use various derivative and hedging products from time to time, as would beavailable and permitted by SEBI, in an attempt to protect the value of the portfolio and enhanceUnit holders’ interest. The Investment Manager may therefore enter into forward contracts,future contracts or buy or sell options in an effort to maintain risks at acceptable levels. TheScheme may also invest in suitable investment avenues in overseas financial markets for thepurpose of diversification, commensurate with the Scheme objectives and subject to necessarystipulations by SEBI / RBI. Towards this, the Mutual Fund may also appoint overseas investmentadvisors and other service providers, as and when permissible under the regulations.TOP Systematic Investment Plan (SIP) Details

SerialNo.

Scheme NameMinimumApplicationAmount(Rs.)

Entry Load # Exit Load #

1HDFC TaxSaver Fund - Dividend / Growth

Rs.500 forMonthly &Rs.1500 forQuarterly

NIL NIL

# Applicable for SIPs registered w.e.f from August 1, 2009  TOP 

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Fund ManagerMr. Vinay Kulkarni (since Nov 21,2006) Mr. Miten Lathia - Dedicated Fund Manager - Foreign SecuritiesTOP Portfolio - Holdings (as on January 31, 2012)

Company Industry+ % to NAVEQUITY & EQUITY RELATED State Bank of India Banks 6.77

ITC Ltd.Consumer NonDurables

5.07

Tata Consultancy Services Ltd. Software 4.88Infosys Ltd. Software 4.13

Bharti Airtel Ltd.Telecom -Services

3.56

ICICI Bank Ltd. Banks 3.08

Bharat Electronics Ltd.Industrial Capital

Goods

2.59

Tata Motors Ltd. DVR Auto 2.56Bank of Baroda Banks 2.44NTPC Ltd. Power 2.44Total of Top Ten Equity & Equity Related Holdings  37.52 Total Equity & Equity Related Holdings  89.14 Total Money Market Instrument & Other Credit Exposures

(aggregated holdings in a single issuer) 0.00 

Short Term Deposits as margin for Futures & Options 0.32Cash margin 0.15Other Cash, Cash Equivalents and Net Current Assets 10.39Grand Total  100.00 Average AUM for the quarter ended December 31, 2011 (RsIn Lakhs) 

2,88,016.58 

Note : $ Sponsor

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Top 5 ELSS schemes to invest in 2011-12

In our market 71 equity linked savings schemes (ELSS) are floating from various asset

management companies. Most investors generally search for best performing ELSS schemesbetween January and March for investment and to save tax because the financial year is comingto end. Investors are in dilemma while searching the best available fund based on their goals andrisk taking capability. In this article, your confusion will be reduced since performance of “BestELSS mutual fund schemes in 2011-12”is reviewed.

SIP best way to invest in ELSS

As discussed, most investors generally rush to invest in ELSS schemes with lump sum amount

between January and March. This is not the right way to invest in mutual fund schemes. To gainmaximum benefit it’s recommended to invest regularly throughout the year by followingsystematic investment plan (SIP). This will take care of volatility in the index and invests aparticular amount regularly into your fund for tax saving.

However, there is a 3 year lock-in period for ELSS investments i.e. any investment that youmake in ELSS schemes cannot be liquidated before 3 years. So, while opting for SIP in particularELSS scheme the fund considers separate 3 year lock-in period for each SIP installment. Forexample, the 3 year lock in for the units bought on 5th January 2012 would end on 5th January2015, for the units bought on 5th February 2012 would end on 5th February 2015, and so on.

Table with top performing ELSS schemes in 2011-12 

§ Religare Tax Plan (G)

  Asset allocation: 80% in equities and 20% in debt instruments. In equity ~60% is invested in large

cap and ~40% in mid cap.

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  Investment style: Bottom up approach

  Top Sectors: Financial services, energy, technology, FMCG and services which constitutes around

65% of total portfolio.

  Top holdings: ICICI Bank, Infosys, Reliance Industries, HDFC Bank and ITC which makes up ~27%

of net assets in the fund.

  Performance: Aggressive towards investment in mid cap and small cap stocks. The fund has

outperformed its peers with fare returns in last 5 years.

§ Canara Robeco Equity Tax Saver (D)

  Asset allocation: 85% in equities and 15% in debt instruments. In equity ~70% is invested in large

cap and ~30% in mid cap.

  Investment style: Mixture of top down approach and bottom up approach.

  Top Sectors: Financial services, energy, technology, FMCG and construction which constitutes

around 65% of total portfolio.

  Top holdings: HDFC Bank, Infosys, Reliance Industries and Tata Consultancy which makes up

~20% of net assets in the fund.

  Performance: Aggressive towards investment in mid cap stocks and diversifies its portfolio by

investing in various sectors. The fund gave ~21% annualized returns in last 10 years and its

outperforming peers / benchmark index in last 5 years.

§ Fidelity Tax Advantage fund (G)

  Asset allocation: 80% in equities and 20% in debt instruments. In equity ~80% is invested in large

cap and ~20% in mid cap.

  Investment style: Bottom up approach.

  Top Sectors: Financial services, energy, technology, FMCG and healthcare which constitutes

around 70% of total portfolio.

  Top holdings: HDFC Bank, ICICI Bank, Reliance Industries, Infosys and ITC which makes up ~30%

of net assets in the fund.

  Performance: This fund invests is tilted towards investment in large cap stocks which is giving

consistent performance among its peers and benchmark index. However, the performance of 

this fund is affected when there is rally in mid cap stocks.

§ Franklin India Taxshield Fund (G)

  Asset allocation: 80% in equities and 20% in debt instruments. In equity ~70% is invested in large

cap and ~30% in mid cap.

  Investment style: Bottom up approach.

  Top Sectors: Financial services, energy, technology, telecommunication and automobile which

constitutes around 65% of total portfolio.

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  Top holdings: HDFC Bank, ICICI Bank, Reliance Industries, Infosys, Grasim Industries and Bharti

Airtel which makes up ~35% of net assets in the fund.

  Performance: This fund is idle for conservative investors due to its investment style skewed

towards large cap / blue chip stocks. In last 10 years the fund gave ~24% annualized returns to

its investors outperforming benchmark index.

§ HDFC Taxsaver Fund (G)

  Asset allocation: 80% in equities and 20% in debt instruments. In equity ~60% is invested in large

cap and ~40% in mid cap.

  Investment style: Top down approach.

  Top Sectors: Financial services, energy, technology, FMCG and healthcare which constitutes

around 70% of total portfolio.

  Top holdings: State Bank of India, ITC, Tata Consultancy Services, Infosys, ICICI Bank and Bharti

Airtel which makes up ~30% of net assets in the fund.

  Performance: This fund is invested towards mid cap stocks which makes it aggressive in this

category. The return in last one year is affected due to more exposure towards banking stocks

which were under pressure on account of liquidity tightening by central bank. In last 10 years

the fund gave ~28% annualized returns to its investors outperforming benchmark index and

peers in the category.

Interpretation of risks while investing in this schemes

Looking at returns shall not be the only criteria for investments. You need to analyze the riskswhile investing in these schemes.

Table with interpretation of risks in ELSS schemes  

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Concern over future of ELSS after implementation of Direct Tax Code (DTC)

The government is planning to implement DTC from April 2012 or from next financial year. Asper last draft of DTC, ELSS will not be considered as tax saving investments. So, assume if thisis a final draft and DTC is implemented from April 2012 then this quarter would be last to invest

in such schemes. The investors investing in this financial year will get the tax benefits andamount will be locked-in for 3 years. The expert’s are of the opinion such steps from government

is to push investments in new pension schemes (NPS) which could be other alternative to buildwealth in the long term and gain tax benefits on investment. However, top AMC’s are trying

their best to get approval on tax benefits for investments in ELSS schemes under DTC. So, thefuture of ELSS is uncertain until final draft of DTC is approved.

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http://www.onemint.com/2011/01/02/tax-saving-elss-mutual-funds/ 

http://www.business-standard.com/india/news/elss-only-for-tax-saving/386324/ 

http://www.finwinonline.com/2010/01/which-tax-saving-fund-elss-fund-to.html