Why this tax-saving fund can be a good addition to your portfolio

Stepping into the last month of the financial year, March, though a tad late for tax planning, still leaves some time for last-minute investments. Equity linked savings schemes (ELSS) or tax-saving mutual funds are good options to consider for investors, given the deduction that is allowed for such schemes under section 80C to the tune of ₹1.5 lakh. The lock-in that ELSS funds entail — of just three years — is much lower compared with any other tax-saving with the scope for healthy capital appreciation over the long term as well. Though the lock-in is shorter, investors would find it rewarding if they held on to well-chosen tax funds for a period of five-seven years at least.

In this regard, Kotak ELSS Tax Saver Fund (Kotak ELSS) may be a suitable addition to your portfolio if you have a medium risk-appetite and a long horizon. The fund has been consistent in its performance and has a track record of over 18 years. Kotak ELSS has been a steady outperformer over the years and has delivered better returns than its benchmark – Nifty 500 TRI – as also several peers.

Here’s why Kotak ELSS must be on your radar for your tax deduction requirements under section 80C and portfolio-building purposes as well.

Consistent outperformer

Kotak ELSS has been around since November 2005. Across medium to longer timeframes, the fund has done very well, though there could be occasional short-term underperformance.

When we take the three-year rolling returns for the fund from January 2013 to February 2024, the fund has delivered mean returns of 16.7 per cent, more than 330 basis points higher than the Nifty 500 TRI.

If we consider five-year rolling returns over the same period, the mean returns are 15.1 per cent, higher than those of peers such as Franklin India ELSS Tax Saver, Aditya Birla Sun Life ELSS Tax Saver and Quantum ELSS Tax Saver.

Further, over the 11-year period mentioned earlier and based on five-year rolling returns, Kotak ELSS has outperformed its benchmark more than 99 per cent of the times, indicating a high level of consistency in returns.

When five-year rolling return period is considered over 2013-24, Kotak ELSS has delivered in excess of 12 per cent more than 80 per cent of the times and in excess of 15 per cent nearly 58 per cent of the times.

Lumpsum investments, say twice or thrice a year, can be considered in the fund. If the SIP route is taken, each instalment of your investment gets locked for three years.

Blended portfolio approach

Kotak ELSS blends the value, growth and opportunistic styles of investing and has been reasonably successful in identifying the right sectors depending on the market environment. Banking and financial services stocks have generally been the top holdings across cycles with weightages varying based on market conditions.

The fund benefitted from investing in information technology and industrial manufacturing stocks early in 2021 and 2022. As valuations soared and business prospects slowed down in mid-2022, Kotak ELSS pared exposure to IT stocks. It also reduced stakes in the relatively-dull FMCG segment in early 2023 as rural consumption slowed down.

In the last couple of years, the fund has gainfully expanded holdings in capital goods, automobiles, auto components and construction sectors.

In terms of diversification, Kotak ELSS holds more than 50 stocks in its portfolio most of the time. Barring the top three-four stocks, most individual firms account for much less than 5 per cent of the portfolio.

The fund takes a multi-cap approach to portfolio construction, though large-caps dominate the holdings. In the recent January portfolio, Kotak ELSS has 62.8 per cent holdings in large-caps, 23.45 per cent in mid-caps and nearly 11 per cent in small-caps.

In the last one year, large exposure to banks has resulted in mild underperformance, as the segment itself has witnessed tepid action barring tiny pockets.

In general, the fund has always remained almost fully invested and not taken any significant cash calls across market cycles.

Kotak ELSS can be a good addition to your portfolio as a diversifier, even as a part of your larger portfolio if you can hold on for more than five years. Linking investments to specific goals would provide greater investment clarity.

COMMENT NOW