Why you should invest in ICICI Prudential Long Term Equity ELSS

Investors following the old income tax regime and having a moderately high risk appetite can invest in Equity Linked Savings Schemes (ELSS) to achieve the twin goals of tax saving under Section 80C and wealth creation over the long term. These funds are also a good way to diversify your overall equity allocation while their statutory lock-in period of three years limits impulsive selling.

With a portfolio biased towards large-caps, ICICI Prudential Long Term Equity Fund (Tax Saving) has a good long-term track record. It has delivered 13.7 per cent annualised returns over the past ten-year period, making it a suitable candidate for your portfolio.

Following a lacklustre performance in the year 2018, ELSS as a category provided average return of 8.2 per cent and 16.1 per cent in the year 2019 and 2020 respectively. Over the past year , the category has gained 70.8 per cent. This extraordinary return is due to sharp fall and subsequent recovery in 2020.

Going forward, investors must moderate their near-term return expectations even though equity as an asset class is poised to deliver decent, inflation-beating returns over the medium to long term.

ICICI Prudential Long Term Equity was launched in August 1999 and has delivered 19.6 per cent annualised returns since then. Over seven- and ten-year periods, it has delivered a CAGR of 12.8 and 13.7 per cent respectively, courtesy its growth investing approach.

On a five-year daily rolling return basis since launch, the fund’s returns have been more than 12 per cent, about 75 per cent of the time. The average five-year rolling return of the scheme is 21.6 per cent.

Since launch, the fund has outpaced its benchmark Nifty 500 TRI in terms of five-year daily rolling returns, about 82 per cent of the time.

The fund has also contained downside well over the years. For instance, in 2018, it held the fort clocking marginal gains even as the category average return came in at a negative 6.3 per cent.

Large-cap safety against volatility

ICICI Prudential Long Term Equity predominately invests in large-cap stocks and follows a mixture of growth and value investing. Currently, it has about 75 per cent of allocation to large-caps, 13.7 per cent to small-caps and 6.7 per cent to mid-caps. The dominant large-cap bias will act as a shield during intermittent bouts of market volatility.

The fund, while choosing stocks, focusses on the fundamentals of the business, the industry, the quality of management, sensitivity to economic factors, the financial strength of the company and the key earnings drivers.

The fund house continues to remain positive on sectors that are closely linked to the economy — such as banks, capital goods, infrastructure, metals and mining. Banking is the most preferred sector of the scheme, followed by software. Private-sector lenders such as ICICI Bank, HDFC Bank and Axis Bank have delivered good returns over the past one year.

The fund has slightly upped exposure in the pharmaceutical sector and currently holds 5.9 per cent in it. It recently added sectors such as insurance and entertainment to its portfolio while exiting media and services.

The fund has been gradually increasing allocation to automobiles sector and recently added Mahindra & Mahindra and Ashok Leyland to its kitty. Apart from these stocks, it has also added Dr Reddy’s Laboratories, SBI Cards & Payment Services and Bank of Baroda. One recent exit is ACC Ltd.

It holds 62 stocks in the portfolio and the top 10 stocks account for 43.5 per cent. Apart from the top four stocks, allocation towards individual stocks is less than 3.5 per cent. Top three sectors form 55 per cent of the portfolio. Thus, the fund mitigates concentration risk reasonably well.

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