ELSS — Improving record

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Vidya Bala

After prolonged phases of underperformance, tax-savings funds are slowly catching up with their open-end diversified peers' category-average. The one-year average return of Equity-Linked Savings Schemes (ELSS) at 28 per cent is, in fact, 1 percentage point higher than the diversified fund category. Besides, barring a couple of ELSS funds, almost the entire universe (43 funds) has outperformed the 17 per cent return of bellwether index Sensex. The three-year track record too has gathered pace, with an average 7 per cent compounded annual return.


ELSS as a category has been an underperformer starting as early as 2007, when the market was racing towards the peak. The funds' decline was steep in 2008, thanks to the high mid-cap exposure of most funds in the category.

As these funds had a three-year lock-in, a good proportion of them took exposure to midcaps, believing that the close-end nature offered protection from redemption and provided sufficient time for mid-caps to deliver. However, most of the funds witnessed sharp declines of 55 per cent or more in 2008.

The one-year chart now, however, sports a different picture. Funds such as Reliance Tax Saver, Quantum Tax Saving and HDFC TaxSaver top the one year performance chart with returns in the range of 38-42 per cent. The top return in this category nevertheless remains much lower than the 51 per cent return bagged by Reliance Equity Opportunities and Magnum Emerging Business, the top diversified funds over a one-year time frame.

Consistent performers

Funds such as Reliance Tax Saver, Religare Tax Plan, Fidelity Tax Advantage and HDFC TaxSaver have consistently been in the top quartile of the return chart over one- and three-year periods.

However, others such as Sundaram BNP Paribas Tax Saver and Birla Sun Life Tax Plan have seen sudden slippage in their one-year return. Sundaram BNP Paribas Tax Saver is currently exposed to equity only to the extent of 85 per cent. The fund house's cautious stand, besides high exposure to large-caps may have capped performance.

Inability of ELSS funds to match their open-end diversified peers may be due to the former's relatively lower exposure to mid-caps. For instance, diversified fund Reliance Equity Opportunities held over 60 per cent in mid-cap stocks while most top performing tax-saving funds restricted exposure to this market-cap segment to 30-40 per cent.

Having borne the brunt of the equity market rout, most ELSS schemes now appear wary of upping their exposure in mid-cap stocks.

Related Stories:
Should I invest in ELSS?
ELSS funds — Beating category average

(This article was published in the Business Line print edition dated October 3, 2010)
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