New entrant Samco Mutual Fund is launching its second equity fund offering in the form of ‘Samco ELSS Tax Saver Fund’. The NFO opens November 15 and closes December 16. This will be the 40th ELSS fund in a crowded category, which has the maximum investor interest as gauged by folio count. To stand out from the flock, the fund-house has claimed that the scheme will primarily invest in high-quality mid and small sized companies. Is this approach different? Is this the best recourse for your tax-saving money? We shall deal with these questions and more in this article. Read on.

Samco ELSS offering

Samco MF believes the ELSS fund, which like others shall have a 3-year lock-in, by investing in mid and small sized companies can offer superior risk-adjusted returns over the long term. 

It plans to pick what it calls 35 ‘high-quality, growth-oriented’ businesses which exhibit dominant market share, high pricing power, good corporate governance standards, and strong balance sheets. To do this, Samco ELSS Tax Saver Fund makes use of the HexaShield Framework, a proprietary strategy, to filter out an investible universe. The fund-house claims that out of a universe of over 67,000 listed global and Indian equities, its investible universe is narrowed down to a select group of 180+ stocks from across the world, because of the HexaShield tested process.

The fund management team analyses companies from this investible universe to construct a portfolio of growth-oriented businesses with high adjusted return on capital employed. 

Mid- and small-cap focus

Samco MF says the majority of existing ELSS funds’ holdings are predominantly invested in large-cap businesses. It cites data that currently on an average about 70 per cent of the total holdings of all ELSS schemes are in large-cap stocks, while the exposure to mid-cap and small-cap is significantly lower.

The average numbers don’t mean that all ELSS funds will have 70 per cent allocation to large-caps. There are about six funds, including ABSL Tax Relief’ 96, BOI Tax Advantage, IDFC Tax Advantage, Mahindra Manulife ELSS, with less than 60 per cent allocation. Also, there is nothing wrong with investing in large-caps because they are the most stable during downturns, and being big companies also have solid businesses and prospects. Mid-caps generate higher returns. On a 3-year average rolling returns basis, the Nifty MidSmallCap 400 index has returned 8 per cent higher returns, compared to the Nifty500 index since April 1, 2005.

Samco MF feels the full flexibility on market cap allocations can be better utilised in ELSS, with larger allocations to mid-cap (ranked 101st to 250th in mcap chart) and small-cap stocks (ranked 251st onward). While mid-caps and small-caps may not outperform in every time period, their performance is visible over a longer period of time. To address the question of higher volatility, the fund-house believes the higher volatility in mid-caps shown in a shorter horizon of 1 year definitely smoothens out when these same stocks are held for a longer time horizon of three years.

It is true that mid-caps and small-caps are not risky businesses. India’s leading premium innerwear and athleisure company is a mid-cap. The same is the case with India’s largest tile manufacturer. The same can be said for the leader in additives, the largest securities depository, the largest QSR player, etc.

Samco MF will disclose the active share of its ELSS tax saver fund daily on its website.

Our take

While Samco MF’s arguments are good, the question to ask yourself is whether you want to expose a lot of it to non large-cap allocation. If your risk appetite is high, you may go ahead. Remember a mid-cap stock in its life can faces two absolute outcomes -- become a small-cap or a large-cap. The typical strike rate seen in 2016 to 2021 of mid-cap stocks to large-cap stocks is 8-10 per cent and from small-cap stocks to mid-cap stocks (similar strike rate) shows the risk. Also, 3 years can be a short time for certain companies in cyclical sectors/ industries to come out of trouble. Hence, invest with a minimum five-year outlook in ELSS funds, with higher mid-cap and small-cap exposure. Many ELSS funds do have a mid-cap bias. And some have delivered well over the long term. But if you are an investor looking to take your money out immediately after the three-year lock-in, the NFO may be a tad risky as the holding period may not be sufficient to deliver a solid outperformance. A waiting period of at least 5-7 years may be required.

The manager chosen to handle the fund does not seem to have proven direct fund management experience.

There is no proven long-term wealth creator in its investment management team. Their HexaShield framework can be a game-changer, but, again, its track record is relatively short.

If you actually want 30-50 per cent allocation to mid-caps and small-caps, you can choose from the likes of UTI Long Term Equity, SBI Long Term Equity, Motilal Oswal Long Term Equity, Kotak Tax Saver, Bank of India Tax Advantage, etc.

Our bl. Star Track MF rating system accords 5 star and 4 star ratings to the following ELSS funds: Bank of India Tax Advantage, IDFC Tax Advantage, Quant Tax Plan, Canara Robeco Equity Tax Saver, DSP Tax Saver, Kotak Tax Saver, Sundaram Tax Savings and Union Long Term Equity.

Interested investors can keep a close eye on the fund and consider it after it builds a good enough track record.

Samco Flexi Cap, launched less than a year ago, so far sports below-average ranks in return terms in the 3- and 6-month periods.