The Hindu Business Line : ELSS Funds — Widely variant record

The broad market fall from January this year has taken its toll on the tax planning ELSS funds as well. The year-to-date returns of these funds have significantly lagged the Sensex, Nifty and BSE-100 returns. Barring Sundaram Tax Saver and Taurus Libra Tax Shield, none of the funds yielded positive returns on a one-year basis. The gulf between the top and bottom five funds’ returns is quite wide, indicating that stocks and sectors chosen may have made a big difference.

Rally participants: Sundaram Tax Saver, DSPML Tax Saver and ICICI Pru Tax Plan managed to deliver 36-55 per cent returns that equalling or bettering the benchmark during the July 2007-January 2008 market rally.

These funds had, in the past year, invested in momentum sectors such as capital goods, banks, metals and energy. These funds had also invested 40-60 per cent of their portfolio in mid-cap stocks (less than Rs 7,500 crore market-cap) which rallied quite sharply in the July-January market run up.

Large tax-saving funds such as Reliance Tax Saver (ELSS) and HDFC Tax Saver were not been able to provide the same level of participation in the rally. Though these funds had a similar strategy as the successful ones, the stock selection and timing may have played a role in making the difference

Downside Containment: The downside protection strategy since January 2008 has a common thread across several funds. Many of the funds have significantly increased exposure to large-cap stocks as a result of the volatility associated with mid-cap stocks.

Funds such as Reliance Tax Saver and Sundaram Tax Saver have moved heavily into cash/debt investments with over 30 per cent of the portfolio invested in such instruments compared to less than 10 per cent a year ago. The increase in asset size has also necessitated move to large cap stocks over the past year.

Concentration of stocks and sectors is also quite reduced. DSPML Tax Saver, for example, has over 80 stocks in its August 2008 portfolio, which reduces the impact from a market downside.

ELSS funds as a category have underperformed standard benchmarks in recent times. Over one- and three-year periods, just one or two funds bettered the benchmark returns. But on a five-year basis, funds such as ICICI Pru Tax Plan, HDFC Tax Saver and HDFC Long Term Advantage Fund have a reasonable track record against benchmarks.

Considering these facts, one or two funds for tax-saving purposes may be enough. Exposure through diversified large- and mid-cap funds and select theme funds may be a better choice for maximising returns associated with the risks taken. Sundaram Tax Saver and DSPML Tax Saver are reasonable bets in the ELSS category.

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