The Hindu Business Line : Fund Talk

I want to invest Rs 1,20,000 in ELSS for tax saving. What are the parameters to select a tax-saving fund? Please suggest some good ELSS to invest. Do I invest Rs 10,000 every month in one mutual fund for 12 months or spread it across five funds with Rs 2,000 each for 12 months? Are there other investments for tax saving?

Sivakumar Iyadurai

Equity-linked savings schemes or tax-saving funds can perk up your portfolio returns apart from providing tax-breaks However, for most investors, tax-saving appears to be the only objective while selecting such funds, as a result of which the track record is often overlooked.

Parameters: Equities are a risky asset class and investment in them cannot be dictated by tax breaks alone. In other words, before choosing an ELSS you need to appreciate that a tax break is simply an additional benefit and the yardstick to select such a scheme is no different from that for regular diversified equity funds.

As investments in ELSS are subject to a three-year lock-in, treat this as a minimum time period for evaluating performance. Three- and five-year periods also give you an opportunity to study the performance over different market cycles. Compare the fund's return with its benchmark and also with peers to see if it has outperformed.

But ensure that you do not compare the performance of peers that have different investment styles. For instance, comparing a mid-cap tilted fund such as HDFC TaxSaver with a large-cap fund such as Franklin Taxshield may not be appropriate. You could also look at the performance of a similar diversified equity scheme managed by the same fund house.

If you cannot stomach volatility, then look for funds that reflect consistent returns rather than short periods of impressive performance and then a lull or underperformance.

The track record of the fund-house and the investment style that suits your risk profile are other parameters to be researched before choosing a fund. Track record should be your top criterion rather than incentives such as "no load".

Fund choice: While you should not restrict yourself to a single fund, about two or three ELSS should suffice to take care of your tax-saving needs. Franklin Taxshield has a good track record in the large-cap category, while Magnum Tax Gain, PruICICI Tax Plan and HDFC Long Term Advantage are funds with a mid-cap bias with a relatively enhanced risk profile compared to the first named. You can go for a combination of these depending upon your risk profile.

A one-year time frame may be too short a period to derive the benefits of rupee-cost averaging through an SIP. You need to have an SIP with at least a three-year investment time-frame to enable averaging your cost through the highs and lows of the market. Keep in mind that each instalment gets locked in for three years from the date of investment. Review the performance of your fund periodically. While you may not be able to withdraw before lock-in you can restrict your SIPs and renew them only if you find the performance satisfactory.

Other tax-saving options: ELSS is just one among the various investment options that gives you a tax break under the Rs 1 lakh ceiling of Section 80C. Unit-linked insurance plans (ULIPs) are another equity option under this category. The traditional provident fund provided by your company, NSC, PPF and five-year bank deposit are few other options on the debt side. A portfolio strategy of asset diversification is equally, if not more, applicable in your tax planning exercise. This means you should resist the temptation of going overboard with equity in your tax break investments. Conventional, assured-return investment avenues should find a place in your portfolio, the proportion depending on the equity-debt allocation you wish to maintain.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Vidya Bala

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