Mutual Funds

Blue-chip focus for a smoother ride

Bhavana Acharya | Updated on October 12, 2014 Published on October 12, 2014

Nikolai Tsvetkov/


Birla Sun Life Focused Equity Series 3 qualifies for tax deduction under the RGESS

Those who qualify for deduction under the RGESS (Rajiv Gandhi Equity Savings Scheme) category have yet another fund to invest in. Birla Sun Life Focused Equity, the third series of the RGESS-compliant fund, is open for subscription until October 21. The minimum investment required is ₹5,000.

First-time equity investors get deduction under the RGESS — Section 80CCG — in addition to the deductions already available under the Section 80C umbrella.

Where it will invest

The fund will invest in stocks that belong to the CNX 100 or BSE 100 index. It is benchmarked to the CNX 100. In line with RGESS rules, investments outside the top-100 basket can be made in stocks that are categorised as Maharatna, Navratna or Miniratna, or public offers of these.

The CNX 100 index, being made up of blue-chips, is far more stable than smaller companies. The fund will put at least 95 per cent of its portfolio into stocks — that’s a high level, but can ensure full participation in the market rally.

The fund plans to pick up only stocks with good long-term growth potential and the means to recognise it.

The fund will be managed by Mahesh Patil, who oversees outperformers, such as the Frontline Equity and Top 100 funds from the Birla fund house.

Points to consider

But a few points need to be considered before plunging into RGESS funds. With no track record to go by, these funds are automatically riskier than those with established track records.

Next, the top ELSS funds which qualify for deduction under Section 80C have delivered superior returns.

Reliance Tax Saver, Axis Long Term Equity, ICICI Prudential Tax Plan, and Religare Invesco Tax Plan, for instance, have returnedupwards of 60 per cent in the last one year and have outperformed over longer time frames of three and five years too.

These funds have a much bigger basket of stocks to choose from, with most benchmarked to the BSE 200 or the broader market CNX 500. In contrast, barring a couple, RGESS funds haven’t beaten their benchmark BSE/CNX 100 by much. For example, the Birla Sun Life RGESS Series I fund’s 35.9 one-year return is just about equal to the CNX 100’s and BSE 100’s 36 per cent return.

So, while the extra tax deduction is lost on the ELSS fund, the superior returns may make up for it.

Being close-ended allows funds to take a longer time view on stocks and pick up over the course of the lock-in period.

But the risk is that at the end of the three-year lock-in period, investments will be redeemed — the fund will not continue as an open-ended fund. If there is some underperformance towards the last part of the lock-in or if the market is trending downwards, it can reverse the good performance during the lock-in period.

Published on October 12, 2014

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