3 tax-saving funds for your portfolio

Morningstar

Apr 27, 2022

Investors who are looking to save tax through Equity Linked Savings Scheme (ELSS) and can withstand the volatility associated with equities can consider these funds to save tax under Section 80C on investments up to Rs 1.50 lakh per annum.

ELSS funds have the potential to generate superior returns as compared to traditional tax-saving products. The ELSS category has delivered 15.47% compound annual growth rate (CAGR) over a three-year trailing period as of April 25, 2022. Over a ten-year period, this category has generated a 14.87% CAGR as of April 25, 2022.

Morningstar Analysts have reviewed three ELSS funds recently.

SBI Magnum Long Term Equity Scheme

Star Rating: 3 stars
Analyst Rating: Neutral (Regular and Direct)
Date of Analysis: February 2022
Morningstar Analyst: Himanshu Srivastava
Investment Style: Large Blend
Inception: May 2007
Fund Manager: Dinesh Balachandran
Upside Capture Ratio: 93 (Fund) versus 96 (category) – 3 year
Downside Capture Ratio: 99 (Fund) versus 97 (category) – 3 year
Performance: 4% (2019), 18.87% (2020), 31.04% (2021)
Equity Holdings: 58
% Assets in Top 10 Holdings: 38
Market Cap% : Large (71.9%), Mid (22.7%), Small (4.97%)
Top 5 Holdings: ICICI Bank, Reliance Industries Ltd, Infosys, Larsen & Toubro Ltd, Tech Mahindra Ltd

Analyst view

When Dinesh Balachandran took over SBI Magnum Long Term Equity in September 2016 from its erstwhile manager Jayesh Shroff, it was his first stint at running a diversified equity fund. Five years into the management of this fund, he has developed a good grasp on his investment strategy and fundamentals of the companies he owns.

The fund’s broader framework has stayed consistent. It continues to be a benchmark-aware predominantly large-cap offering. Balchandran adopts a valuation-conscious approach, and this plays a dominant role in portfolio construction. That said, he does not mind being flexible on valuation in areas where he is confident on the underlying theme and its long-term growth prospects. He is flexible with his stock picks, too. He won’t shy away from investing in a firm that is not a best in class but has a good risk/reward prospect. Balchandran uses a combination of both top-down and bottom-up stock selection. The strategy has some inherent risk. For instance, given Balchandran’s value focus, the fund would struggle in growth-oriented markets such as the period between 2017 till early 2020.

Currently Balachandran is adopting a conservative approach while constructing the portfolio as he is not sure about the prospect of economic growth. He will build exposure further, when there are more visible and apparent signs of economic turnaround, broad-based growth, and the earnings cycle turning positive. However, this conservative approach held the fund’s performance back in 2021 with the markets witnessing a sharp bull run.

Mirae Asset Tax Saver Fund

Star Rating: 5 stars
Analyst Rating: Silver (Regular), Gold (Direct)
Date of Analysis: January 2022
Morningstar Analyst: Nehal Meshram
Investment Style: Large Blend
Inception: December 2015
Fund Manager: Neelesh Surana
Upside Capture Ratio: 107 (Fund) versus 96 (category) – 3 year
Downside Capture Ratio: 97 (Fund) versus 97 (category) – 3 year
Performance: 14.07% (2019), 21.54% (2020), 35.29% (2021)
Equity Holdings: 68
% Assets in Top 10 Holdings: 45
Market Cap% : Large (82.45%), Mid (14.03%), Small (3.52%)
Top 5 Holdings: Infosys Ltd, HDFC Bank Ltd, ICICI Bank Ltd, Reliance Industries Ltd, Axis Bank Ltd

Analyst View

Lead manager Neelesh Surana, who is also the CIO of equity, is one of the most impressive portfolio managers in the Indian mutual fund industry. Surana has been the key decision-maker on the strategy since its inception in December 2015. He has been with the fund house since 2008 and has proved himself as an accomplished manager, delivering above-average returns with his bottom-up stock-picking approach.

Surana follows a blend of top-down and bottom-up approach to investment and identifies stocks with a growth at reasonable price framework. He predominantly invests in large-cap stocks and picks high-growth-oriented companies across sectors and market-cap segments that are available at reasonable valuations. With a view to holding a company for the long term, the team digs deeper to understand the underlying nature of a sustainable business model, such as analysing the economic value contributed over time and the dynamics of the industry in which a firm operates.

Alpha is generated mainly through stock selection rather than sector rotation. The portfolio manager is willing to ride through periods of adversity and stick to his long-term views, exhibiting patience and conviction in the stocks in which he is invested. Taking cash calls is not part of the strategy. Given the manager’s focus on companies with high cash flows and high return on equity, he has consistently remained underweight to real estate, infrastructure, and construction companies as these businesses typically don't have these traits.

Franklin India Taxshield

Star Rating: 3 stars
Analyst Rating: Neutral (Regular), Bronze (Direct)
Date of Analysis: January 2022
Morningstar Analyst: Himanshu Srivastava
Investment Style: Large Blend
Inception: April 1999
Fund Manager: R Janakiraman, Anand Radhakrishnan
Upside Capture Ratio: 99 (Fund) versus 96 (category) – 3 year
Downside Capture Ratio: 112 (Fund) versus 97 (category) – 3 year
Performance: 5.13% (2019), 9.81% (2020), 36.70% (2021)
Equity Holdings: 55
% Assets in Top 10 Holdings: 53
Market Cap% : Large (87.82%), Mid (7.99%), Small (4.19%)
Top 5 Holdings: ICICI Bank Ltd, Infosys Ltd, HDFC Bank Ltd, Axis Bank Ltd, Bharti Airtel Ltd

Under Anand Radhakrishnan, this fund will be managed in a similar fashion as Franklin India Flexicap Fund. The investment process continues to be research-intensive in nature. Managers and analysts jointly draw up the investment universe. Analysts gauge companies using discount cash flow models and parameters such as return on equity, price/book value, and price/earnings. Sector-based model portfolios created by analysts are compiled by the research head to create market-cap-based model portfolios that serve as guides to the portfolio managers. Radhakrishnan seeks companies with clean balance sheets. He looks for steady businesses with sustainable competitive advantages that can generate healthy ROEs and ROCEs. A rather contrarian streak is also perceptible in the manager’s stock picks.

Radhakrishnan will pare or exit positions he believes are expensive. That said, the strategy is not without risks. A valuation-conscious approach and the manager’s inability to play momentum will hold the fund back during speculative or bull markets. Like other funds, this fund also struggled in the past owing to a few investment calls which could have been best avoided. Taking note of that, the investment team took measures and honed their security selection criteria to avoid investment mistakes. Although the investment strategy is tagged with inherent biases along with higher volatility, Radhakrishnan has been managing funds with a similar approach for a long time, and under him it has the potential to deliver superior performance over the long haul.

Radhakrishnan is benchmark-agnostic while constructing the portfolio and selects stocks using a bottom-up approach. This, coupled with his penchant for contrarian bets, often results in a portfolio that is unlike that of the typical peer. For instance, his investment in the healthcare sector in 2017 bears out his willingness to invest against the grain.

Portfolio holdings as of March 2022.

3 tax-saving funds for your portfolio

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