Mutual Funds

Fund Query: Should I continue with HDFC Tax Saver or switch?

Aarati Krishnan | Updated on: Apr 23, 2022

Equity funds, by their very nature, need a 7 year-plus horizon to deliver inflation-beating returns

I am a retired person and am 70 years old. I have invested in two ELSS funds solely for tax deductions under Section 80C. One is Axis Long Term Equity, where I do a SIP of ₹5,000 on the 5th of every month and ₹2,000 on the 25th. The second fund is HDFC Tax Saver where I do a SIP of ₹3,000 on the 10th of every month and ₹3,000 on the 25th. The 5-year trailing return for HDFC Tax Saver is 9.7 per cent against 15 per cent for Axis Long Term Equity Fund. Please advise me whether I should continue with HDFC Tax Saver or switch to another fund. I have invested in the fund only for tax saving and will withdraw after the lock-in period.

Nirod Kumar Das

You need to re-examine if ELSS schemes are indeed the best option for your section 80C savings. ELSS schemes invest in a mix of large, mid and small-cap stocks. Being equity funds, such funds can suffer significant capital losses if markets correct. If you have low tolerance for such losses, you shouldn’t be investing in them.

Even if you have invested in these funds because you have the risk appetite to take short-term losses, you shouldn’t be expecting to withdraw money from them in three years. Equity funds, by their very nature, need a 7 year-plus horizon to deliver inflation-beating returns. This is especially true when you start investing at high market valuations. Plus, taking the SIP route makes it trickier to withdraw from these schemes because each of your SIP instalments needs to complete 3 years for you to withdraw. For many seniors, capital safety and liquidity are priorities and ELSS funds don’t offer either. Yes, all 80C options do carry a lock-in period. But avenues such as the post office Senior Citizens Savings Scheme, NSC and tax saving bank deposits do offer capital safety with assured returns, even if they come with a 5-year lock-in.

Having said this, yes, HDFC Taxsaver has lagged Axis Long Term Equity over a 5-year period. But it has outperformed it over the last one year. While both schemes invest 80 per cent plus of their portfolio in large-cap stocks, HDFC Taxsaver is a more value-oriented fund, while Axis Long Term is a growth and quality-oriented fund. Owning two funds with different styles in your portfolio is not a bad idea as different styles tend to outperform at different market phases.

I am investing in Motilal Oswal Nasdaq 100 Fund through SIPs. Please suggest another good international fund to invest in.

Kavindra Salunke

When it comes to international funds, US-oriented ones offer a good fit for Indian investors. US exchanges offer good diversity as many of the leading companies from other geographies list here. One of the key reasons for Indian investors to diversify internationally is to hedge against the rupee depreciating against the dollar. This argues for investing in US markets too, to get exposure to dollar-denominated assets. As Nasdaq 100 is a tech-heavy index and you already own it, it may be good to invest in funds that have diversified exposures beyond technology.

One possibility is to invest in passive options such as Motilal Oswal S&P 500 Index Fund which invest in indices tracking the broad US markets. The other is to consider active options like the Franklin India US Opportunities Feeder Fund and ICICI Pru US Bluechip Fund, which invest in a wider basket of US listed stocks and have a fairly long track record. However, international funds have not been accepting fresh investments since February 2022 because SEBI has cautioned on the industry-wide limit on the assets of overseas funds being breached. You will need to wait for the funds to re-open before investing.

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Published on April 23, 2022
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