The Hindu Business Line : Franklin India Taxshield: Invest

Conservative investors looking for tax saving options in the equity space can consider investing in Franklin India Taxshield. While the fund’s one-year return of 19.3 per cent does not place it among the top performing funds in the ELSS space, its large-cap tilt has weathered the current volatility better than a good number of its tax-saving peers which invest heavily in mid and small-cap stocks. Over a three and five-year period, the fund has equalled/outperformed its benchmark S&P CNX 500 — an index considered not easy to beat.

ELSS performance

A good number of tax saving funds with at least a three-year track record have historically had a mid-cap bias. The three-year lock-in mandate in these funds may have prompted higher exposure to smaller companies that hold potential. This strategy appeared to have worked well for sometime as seen from the over-50 per cent compounded annual return still sported by a few funds over a five-year period. However, after a heady rally in 2005, tax saving funds as a class declined steeply in the May 2006 correction and have since been struggling to make a comeback.

This has resulted in ELSS trailing regular equity diversified funds by a wider margin. Volatility in the stock markets has also resulted in stock holdings of these schemes languishing longer than usual. Interestingly, a good number of them, however, continue to stick to their strategy of having higher exposure in mid-caps. ICICI Pru Taxplan, for instance, has only 27 per cent in stocks with a market capitalisation of over Rs 10,000 crore.

The present market volatility, combined with the steeper decline in stocks from the lower market cap segment, has, therefore, led to a number of these funds scoring in single digit over the last one year. Investors may have to temper their expectations from ELSS and opt for funds with lower risks. Funds from the diversified equity scheme basket provide better options from a returns perspective.

Suitability: Franklin India Taxshield is suitable for low-risk investors who are looking at equity tax saving options. The returns generated appear commensurate with the relatively lower risks undertaken.

As a general practice, it may be more prudent to protect capital when money is invested with a view to save tax. Investors would do well to include debt tax saving options along with equity for the purpose of claiming deduction under section 80C of the Income Tax Act.

Performance: Sundaram BNP Paribas has returned 42 per cent over a five-year period, beating its benchmark return by 4 percentage points and outperforming the S&P CNX Nifty by a higher margin. Over a one-year period its returns have just matched the average category returns of equity diversified funds. From the market high in January till date, the fund has declined lesser than its benchmark as well as all other tax saving funds with a three-year record.

Invest in phases to avoid exposing a large sum in a volatile market. The fund also provides an opportunity to hold a basket of large-caps that hold relatively attractive valuations in this market. Mr Anand Radhakrishnan has been managing the fund from April 2007.

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