The Mutual Fund Show: The ELSS Schemes You Can Opt For To Save Tax

Investment in these tax-saving funds can help you save tax.

A tax advisor looks over paperwork while working with a customer (Photographer: David Paul Morris/Bloomberg)  
A tax advisor looks over paperwork while working with a customer (Photographer: David Paul Morris/Bloomberg)  

This time every year, employees rush to make quick investments in mutual fund schemes that help them save on tax.

In this week’s The Mutual Fund Show, Kaustubh Belarpurkar, director of manager research at Morningstar Investment Adviser India, speaks about the best equity-linked saving schemes available. Most such funds have a multi-cap mandate with a large cap bias, and come with a three-year lock-in period.

The lock-in period, Belapurkar said, is good because it lets fund managers have greater visibility on their assets under management, helping them construct portfolios accordingly. “So, one should invest only that part of the funds which aren’t needed for three years.”

After accounting for the provident fund contribution and other investments allowed under under section 80C, the shortfall to meet the Rs 1.5 lakh available limit can be invested in tax-saving funds, he said, suggesting specific schemes for investors.

Watch the show to understand them:

Here are the edited excerpts from the interview:

What are the few things that people should keep in mind while investing in tax-saving funds?

Belapurkar: I think it’s human nature to kind of scramble around at the last minute when you get in. Tax-saving ELSS or tax-saving mutual funds are a great way of doing that, and there are a couple of things you need to keep in mind. One, given that equity is a long-term investing asset class and the way funds are structured, while the lock-in is only for three years, we would recommend coming in with at least a five-year investment horizon, if not more, because we know markets can be volatile, and in times such as these when markets are trading at new highs, it’s very important to have the right investment horizon in mind. I think that’s of paramount importance that we think about what really is your investing horizon and the money that you’re putting aside to save tax because the last thing you want that when you come in at a shorter time horizon, markets are flat, they’re negative and you actually need to exit your investment at a loss or maybe a flattish rate... So I think that’s an important thing to keep in mind before we carry on talking about what ELSS funds we like and obviously if you have the time, you can actually start staggering investments from the start of the financial year rather than kind of putting it right towards the end of the year. April 2020 would have been a great time to make your investments for the financial year. So, I think that’s really some broad pointers that you must keep in mind when you’re making these investments.

For example, I have EPF contributions that go out but I also have been doing some bit of PPF, though I’ve scaled it down over the years. Therefore, when I’m investing within the 80C amount for tax-saving funds, would you reckon that I should do those investments only to the tune of Rs 1,50,000 minus the amounts that are going in already or do you believe that the entire Rs 1,50,000 is good to do because tax-saving mutual funds anyway are a good option?

Belapurkar: When you look at it from the perspective of your overall portfolio, are you looking for an equity exposure or a more fixed exposure depending on your risk profile and your investment horizon? I think that’s important. For a more aggressive, longer-term investors, you could potentially look at putting the entire Rs 1.5 lakh, obviously, you have a PF contribution but whatever difference that’s there, can easily go into an ELSS fund. Someone who has got a shorter-time horizon doesn’t want to take on excessive amount of risk and maybe wants to take a pragmatic approach by putting a smaller amount and allocating to some of the other options that are available, maybe PPFs or some of the other fixed interest options that are available within the portfolio for 80C savings. Obviously, the other element that comes in now with the old and the new tax regime is only relevant if you’re in the old tax regime, but the broader thing is also that we think ELSS funds while it comes in with an enforced locking, it’s actually a great investment product just to start with. One of the things that we talk about is that while investors feel hey, why do I need to lock in my money for three years? But three years is actually very little time if you look at an equity investment. So in a way, if I’m a new investor I wouldn’t mind actually telling a new investor to invest in the ELSS theory because mentally the investor can’t redeem in the next three years so the financial discipline comes in that they stay invested despite say if the market crashes or whatever the case may be. I think, that kind of also brings an element of financial discipline, and with especially the newer less-savvy investors, this can be a great tool to kind of use not just for tax-saving but even for kind of mentally tuning investors to stay invested in the markets.

Should one bother about the size of the fund, fund manager’s characteristics and the house or do the normal rules for mutual fund selection apply to tax-saving funds as well?

Belapurkar: I would definitely think that yes you have to be prudent about the fund you’re selecting and size may not necessarily, it could be a criteria thinking about if you want to do some filtering on the funds but it’s not something that can make or break. When you look at the construct of the ELSS funds within the Indian mutual fund space, there’s still predominately large-cap biased funds. So, I don’t think there is a size constraint per se in terms of a very large fund being difficult to manage. I think what’s important is to understand the investing philosophy of the fund and have they really stuck their guns out even through trying times because when things are good for you and your style is working that’s great, but even within trying times if you’ve really stuck to your investment mandate and your core investing philosophy, I think that’s really the test. Also you need to look at that fund from the fitment of your work of your overall portfolio. We talk about styles and I think that’s very crucial and maybe it will be best addressed when I talk about some of the specific examples of funds that we like. We can really make that relatable as to what that style is and how does that fit in the portfolio.

Are you going to speak about them in the pecking order of preference or a random order?

Belapurkar: No, this is completely in a random order. Let me actually start with the ones which are more popular right now and because they’re the funds that have been doing very well. So, there’s one fund that we feel and like for a long time is the Axis Long Term Equity. If we spoke about size, it is the largest ELSS fund that’s being managed in the industry right now. There are a couple of things that are very crucial to keep in mind when you think about this fund. When you think about its philosophy, we spoke about the style and the philosophy and as Jinesh Gopani manages the fund, clearly the entire Axis’ philosophy or the ethos is looking at companies that have growth, investing in high growth stocks and they don’t really worry too much about valuations because they believe that as long as the growth rates of the stock can justify the valuations even though the valuations have gone up, they’re happy investing in it for the long term. This is something they’ve applied for a fairly long period of time. So it’s not like something that they started adopting only two three years back, they’ve been doing this as an asset manager pretty much since it’s inception and this fund’s been doing really well over the last two to three years. But if I just dial back the time to 2016 and 2017, the fund went through a trough and what’s important to understand is what happened with it and what did the manager do. We spoke about the fund manager’s style, growth and he doesn’t mind paying a premium for that growth. So, if you saw the stocks in the screen that he’s currently holding the likes of Bajaj Finance, he’s obviously overweight in stocks like HDFC Bank, he’s got a lot of financials, consumer cyclicals, some of the consumer defensives too as he’s got stocks like Avenue Supermarts. Some of these are stocks that might identify as expensive but are high growth stocks. This time he’s been trying like I said for a long time. So, 2016-2017 was a market cycle that really favoured some more of the cyclicals, sort of metal stocks and some of those which Jinesh’s philosophy completely avoids. So, it didn’t work but he stuck his guns and he proved his point when the market cycle turned in favour of his style, we’ve spoken about how it’s been a polarised market towards high quality, high growth companies for the last couple of years. It’s really paid off for him but the one point is that he didn’t give up because the market sector wasn’t in his favour four to five years back. So, I think even the philosophy of sticking to that has really favoured and paid off but just a word of caution, obviously we’ve seen a lot of money coming into this fund over the recent past given the super nominal returns that some of these funds have delivered more recently as compared to the peer group. I think that’s something that we just want to advise investors that market cycles can turn, the fund could again potentially go through a trough on a relative basis because the market cycle turns towards probably more value or the cyclical names. But the point is over a market cycle should do really well holding on to this philosophy because the manager is not going to change the way he manages the funds. I think that’s very important.

Why do you like the Mirae Tax Saver Fund?

Belapurkar: I think we spoke about Axis being for sort of growth, not really being too perturbed by valuations, and the Mirae probably dials it back a bit. When we look at the Mirae Tax Saver fund, there’s Neelesh Surana who manages the fund. He is a great manager. Obviously he’s managed funds with a fairly long track record with a lot of success. When you look at his style, he’s predominately a growth manager, but he also looks in building in that sort of margin of safety into his purchase price because you know he’s looking at what the intrinsic value of the stock is and can you get it at your marginal safety discount when he’s buying the purchases. That means that he would probably take back his exposures and stocks when the valuations become a little too excessive, when they’ve run ahead, and probably buy them back when they become cheaper from that relative context. So, he is more of a growth or a reasonable price manager that shows up in the way he manages his portfolio. He would also buy what we would call with a value-tilt... not a large component, but he will definitely take some bets on that. I think the classic case where they did move into healthcare more than a year back seeing that obviously valuations were very compelling, there were some good companies to buy and that’s obviously paid rich dividends to them in the year 2020. So, I think overall a solid process—he’s looking into that sort of slightly more diversified portfolio. Axis was a more concentrated portfolio, you should typically build a 50-60 stock portfolio but also be a little more conscious about valuations and trim positions if required. At the same time also take in some value positions where they see that fundamentally nothing’s wrong with the stock but they’re being beaten down for other reasons. So, I think overall again this has been very beautifully applied to process and obviously the proof of the pudding is that the funds have done really well right across market cycles.

Is the word of caution also there because it’s done so well that there could be some underperformance going ahead?

Belapurkar: Absolutely. I mean, that would be like a common theme I think for all funds. The most common metric that people would be happy to look at is the most recent fund. That’s great. For us, it is important because it’s proof the pudding that is the style working for the manager or not. But that shouldn’t be the only criteria. People should understand or deconstruct where the performance has come from and also be acknowledging the fact that the market cycles will change. Have you seen over the last two three months, suddenly there’s been this slightly short term but we’ve seen this more value or beaten down stocks kind of starting to pick up. It’s also been the case for the first year or two weeks of the year. It’s still very early days but neither you me nor any fund manager can really predict when that market cycle is going to turn but there could be periods where a particular style can underperform and that’s why we always think like this. When you think of fund, try to think of it from the context of portfolio—if you have all growth style funds in your portfolio, you’re probably better off picking a value-tilt fund because you’ll really diversify your portfolio beautifully rather than really be concentrated towards a particular style which could do well for a period but suddenly you have a major lull period where all your funds aren’t doing well. So, you must rather have funds with different styles which could be an all-weather portfolio as we call it.

The third one is DSP Tax Saver Fund. Why do you like this fund? Kalpen has really institutionalised the process, etc. On the fund management side, they’ve had a few exits, maybe not for this fund individually but at a senior level — Anup went away some couple of years back, Bala joined and he also left. Is that a worry at all or the process is in place enough to see through?

Belapurkar: I’ll actually address the second part of your question to lay the context for why we like the fund. You’re right, Anup was an integral cog of the wheel for DSP and then he moved on. I think what’s important to acknowledge is that one was when they were working with BlackRock, they really set in place a lot of investment processes and they only kind of fine-tuned them based on risk management, with the overall investing framework. They really ironed those out over the years when they really fine-tuned it ever since the joint venture of BlackRock happened with DSP. That said, the other things also are important to understand that people like Rohit Singhania, who manages this fund, he grew as an analyst within the team and then took on the fund management responsibility and has come up the curve. You obviously have Vineet who is more of a mid- and small-cap specialist and the rest of the team has really stayed stable over time. So, one is obviously the great processes as a lot of people with vintage from the DSP-BlackRock days are still within the system. I think that gives them an immense amount of comfort that the processes again, are pretty rock solid and you will see that across their strategies. I think that’s very important to acknowledge. When I think of Rohit as a fund manager I think he’s a little more fluid in his investing thought process. Again, he’s got a large-cap bias but he will look to maybe even trade it in and out, as you would see that his portfolio would have a little more churn than his peers. The mid-cap portion of his portfolio is obviously buy and hold and remain steady and that’s where I think DSP is among the better teams in identifying the mid- and small-cap stocks, which is a great plus. On the large-cap side, he would kind of do a little bit of complex cyclical plays, trade in and out when valuations become excessive on certain counters and overall, not really worry too much about what the benchmark holdings are or what the sector weightage is. He can move fluidly between that and that’s his style, and he’s applied that pretty well over a period of time. In some of his stock holdings you’d see a name like Bharti Airtel, ICICI Bank, which is another favourite of his probably relative to an HDFC Bank too as that’s got a higher weightage. So I think broadly it’s a great investment process but he’s more again I would say in the middle. I mean he’s looking to diversify growth, but he also looks at some value-added investments. That’s why I started in this particular style — I spoke about a peer group manager which is Axis and then I moved to a more sort of growth at a reasonable price and then moving down the spectrum away from growth stocks to more blended value which is Rohit and then that will lead us to our fourth manager.

The last one is interesting. Why Franklin?

Belapurkar: If I just think about the style of the fund and the way it’s been managed. Lakshmikanth Reddy took over the reins four-and-a-half years back. Now he runs a pretty counter-cyclical strategy as he has got much greater core and value blend within his portfolio and if you look at the most recent track record of the returns of the fund, you probably won’t want to pick the fund because you think that hey this fund has not done well, but there’s a reason for it as because it is his investing style. Like we spoke about earlier he’s been in favour of growth and obviously, given where he’s been plying his portfolio. In fact, if you look at his most recent position he’s got overweight sectors like utilities, consumer cyclicals which are kind of now making a comeback. So, he’s taking that approach. It’s not necessarily paid off in recent times because the market cycle wasn’t stable, but that’s the beauty, right? You try to pick managers as I said with different styles. Now, even within his banking exposure when you look at it, he’s got some of the more corporate banking games like Axis Bank being his top holding. It is a slightly differentiated portfolio as compared to the others. The other thing Lakshmikanth does really well is he’s pretty agnostic and he does take some bold sector calls in utilities. So there’s a slightly away from a benchmark strategy but I think it’s an interesting play to someone who has got a large component in the growth stock or the growth spectrum of his portfolio. Investors can definitely look at adding something like this fund in the portfolio.

Would you reckon that people rather start off their tax-saving SIPs from April itself or is it okay to do it in the month of January, February and March?

Belapurkar: So, some discipline would be great. We talk of doing SIPs as a regular investment in other equity funds. I would say, why not in tax funds, right? I wish I had done some of my investing back in April if I had the liquidity, then I would be smiling a lot more. We can’t time the market obviously but to take away that human emotion, why put yourself at risk? While it might not be a large proportion of your portfolio, but it is just nice to have that discipline so that you’re not scrambling at the last moment to find a fund or make that investment to stagger it down and to set an SIP in process. You can just pick one or two funds and just keep at it or even one fund is good enough. So, that discipline is always good to have. Most of us don’t end up doing it but it’d be nice for all of us to practice that.