5 tax-saving mutual funds rated by our analysts

By Himanshu Srivastava |  16-11-22 | 
 

Equity Linked Savings Schemes, or ELSS, are diversified equity funds that offer a tax break under Section 80C of the Income Tax Act. Here are our analysts rate some of the funds. You can read what the rating indicates.

The funds are listed in the order of the analysis, the latest ones given predominance.

AXIS LONG TERM EQUITY

  • Date of Analysis: November 2022
  • Analyst Rating: Silver
  • Analyst: Kavitha Krishnan
  • Fund Manager: Jinesh Gopani
  • Market-cap Tilt: Around 50%-70% of the portfolio in large caps
  • Brief Analyst Note
  • Performance
  • Portfolio

Gopani looks for companies that have the capability to grow over a three- to five-year period and seeks to find quality names at reasonable valuations. However, he can tend to invest in stocks that are slightly expensive in relative terms (reflected in the fund's higher price/earnings ratio) as long as they meet his quality-growth criterion. The portfolio holds about 50%-70% large-cap stocks, while small and mid-caps constitute the remaining portion. The focus is on being able to identify companies with sustainable earnings growth potential, credible management, and good corporate governance practices. Stock-picking is based on fundamental bottom-up research with an emphasis on top-down risk parameters, liquidity, and internal volatility targets.

From a financial standpoint, the team looks for companies with low capital gearing and strong balance sheets. It undertakes a 360-degree approach while evaluating a company by ensuring thorough channel checks are in place and spends time speaking to dealers, distributors, clients, and so on.

The fund house has a research universe of about 350 stocks bucketed into three segments based on the frequency and depth of coverage. It seeks to spend more time identifying fresh ideas and researching companies that are not as widely researched by the broader market. The research team also runs a live model portfolio, essentially a combination of its best ideas.

Also Read: Why has Axis Bluechip disappointed?

ICICI PRUDENTIAL LONG TERM EQUITY

Harish Bihani relies primarily on his bottom-up stock-picking abilities and is confident this approach will work well over a period of time. To that extent, he avoids taking big calls based on macro environment or on markets unless he believes that the market is over-heated.

While Bihani is mindful of valuations, he wouldn't mind paying a premium for a company as long the numbers meet his growth criteria. This approach is relatively different from other managers from the fund house like Naren and erstwhile manager Mrinal, who basically ran a value driven investment style. That said, he looks for the catalyst for value investment very carefully, while investing in value stocks. Bihani is not benchmark-agnostic when it comes to investing. But there is an internal risk committee which looks at the sector allocation relative to the benchmark on a regular basis. In case there is any significant sector deviation, then this must be approved by the CIO both on the upside as well as downside.

His investment style is long-term in nature, and therefore, he adopts a buy and hold approach with no tactical portion in the portfolio. A notable aspect of the strategy is manager's unwillingness to take much risk in the portfolio. This may hold the fund back during momentum driven markets but help when things are adverse. It's a well laid down process with various yet significant elements attached. The execution is therefore important here and that remains an untested aspect as of now.

Also Read: Why we like these 3 funds from ICICI Prudential

SBI MAGNUM LONG TERM EQUITY

  • Date of Analysis: February 2022
  • Analyst Rating: Neutral
  • Analyst: Himanshu Srivastava
  • Fund Manager: Dinesh Balachandran
  • Market-cap Tilt: 60%-70% of the portfolio is invested in large caps
  • Brief Analyst Note
  • Performance
  • Portfolio

The fund is a predominantly large-cap offering managed with a valuation-conscious approach.

While evaluating stocks, manager Dinesh Balchandran uses valuation matrices such as EV/EBITDA, P/E or P/B among others, whichever is apt for a given sector. This is then supplemented by the outcome of an internal quantitative model. 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.

The portfolio is constructed with a benchmark-aware approach. A combination of top-down and bottom-up styles is used for stock selection. Balchandran prefers stocks that display change in margin and have a margin of safety and good earnings outlook over the long term, but he avoids highly leveraged businesses. He is flexible with his stock picks and won't shy away from investing in a firm that is not a best in class but has a good risk/reward profile. While a benchmark-aware approach can theoretically reduce the risk of relative underperformance, the valuation-consciousness will result in the fund struggling in growth-oriented markets, as it has been between 2017 and early 2020.

The investment approach is common enough, and its execution will play a key role in determining the fund's long-term success. So far, the execution of the strategy hasn't been encouraging.

Also Read: 6 funds most  highly regarded by our analysts

FRANKLIN INDIA TAXSHIELD

  • Date of Analysis: January 2022
  • Analyst Rating: Bronze (Direct), Neutral (Regular)
  • Analyst: Himanshu Srivastava
  • Fund Manager: Anand Radhakrishnan
  • Market-cap Tilt: Traditionally, 70% of the allocation has been maintained in large caps and 30% in mid/small caps
  • Brief Analyst Note
  • Performance
  • Portfolio

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.

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.

Also Read: 6 smaller fare funds to consider

MIRAE ASSET TAX SAVER

  • Date of Analysis: January 2022
  • Analyst Rating: Gold (Direct), Silver (Regular)
  • Analyst: Nehal Meshram
  • Fund Manager: Neelesh Surana
  • Market-cap Tilt: Traditionally held around 70-80% in large caps
  • Brief Analyst Note
  • Performance
  • Portfolio

This strategy is focused on identifying stocks with a GARP framework. The investment philosophy of the fund is built on three core principles: quality businesses with stable earnings, strong management, and attractive valuation. The process includes both quantitative and qualitative stock screening with bottom-up stock picking.

The sector selection is done through a top-down approach mainly based on growth prospects. Analysts then assess stocks at the industry and company levels and focus on key drivers such as returns on capital employed, returns on equity, and EBITDA margin. Within the framework, there is a lot of emphasis on qualitative analyses like management quality and execution capabilities. These are quantified by evaluating the trailing 10-year track record, which helps in removing subjectivity. While selecting mid-cap stocks, the manager typically looks for slightly higher ROE and growth rates as compared with large-cap stocks, given these stocks come with liquidity and other risks.

There is a further focus on valuation, which becomes a key driver behind entry and exit timing. This valuation process along with quantitative factors, drive the conviction level in the stock, which helps to exclude companies where business fundamentals are not solid. Meeting with company management is vital here to gain company specific and industry information. The strategy holds a well-diversified portfolio with a long-term perspective, helping the fund outperform over the long haul.

Also Read: Should I exit my ELSS after 3 years?

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