ELSS A solution for tax saving and long term financial planning
Investment thoughts
Most salaried tax payers awaken to tax planning only in December when the accounts department at office rings the alarm bell for proof of tax saving investments. A few calls / visits to tax planners, insurance agents and postal savings agents later, the immediate objective of investments and proof submission is met. However, no attempt is made to understand the tax planning process thoroughly. As such, individuals end up investing in avenues which may not necessarily map out their long-term financial goals. At that point, saving tax is the objective and not investment. An analysis by CRISIL suggests that it is possible to do both tax planning and long term financial planning together. Further, if one is willing to take some risks, Equity Linked Savings Schemes (ELSS) offered by mutual funds provides an opportunity to generate attractive long term returns, if invested for longer period (more than 5 years).
historically provided high returns over longer periods. The S&P CNX Nifty has returned over 16% in the 10-year period ended December 30, 2011, almost double compared with around 8-10% yielded by tax saving debt instruments. Among equity tax saving instruments, ELSS, ULIPs and the equity option of the NPS are available for investment. The lock-in period for ELSS is three years, for ULIPs, it is five years, and NPS, has a lock-in period till 60 years of age. Table 1 - Performance of ELSS
Category/ Index ELSS Category Average* Maximum returns in the category Minimum returns in the category SIP Returns of CRISIL Fund Rank 1 ELSS Scheme** S&P CNX 500 (Benchmark for ELSS schemes) Returns from PPF investment Returns from investment in NSC^ Average Inflation rate 3 Years 5 Years 7 Years 10 Years Returns % Returns % Returns % Returns % 17.92 2.56 11.91 22.28 26.28 11.77 17.73 28.25 6.13 -3.44 5.16 13.47 7.41 16.01 8.02 8.16 7.57 7.61 1.77 8.01 8.16 6.80 10.56 10.56 8.01 8.16 6.40 19.57 18.06 8.13 9.10 5.80
Rs 20,000 Every section has a individual investment limit as per the Income Tax Act Rs 1,50,000
Data as on December 30, 2011 All returns are annualised * Category average of all CRISIL Fund Rank ELSS as of December 2011 quarter ** Rs 10,000 invested every month in a CRISIL Fund Rank 1 ELSS Scheme ^ Semi annualized returns, assumed that a 6-year NSC is rolled over at the prevailing rates for calculating 7-year and 10-year returns
Performance
As indicated in Table 1, ELSS beat the benchmark (S&P CNX 500) in all the periods analysed. Additionally, these funds have also provided positive inflation adjusted returns across 3 of the 4 periods analysed. This gives us a fair idea of the benefits of investing in ELSS to generate higher returns in the long term in addition to saving tax.
CRISIL FUNDINSIGHTS
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Market - Overview
Indices
BSE Sensex S&P CNX Nifty
The Indian equity market (S&P CNX Nifty) fell over 4% in December, primarily due to continuing worries over the Eurozone debt crisis and slowing domestic economic growth. Domestic factors such as rejection of key reform bills by the parliament, including foreign direct investment (FDI) in retail, SEBI barring seven companies and their promoters for irregularities in IPOs and weak auto sales numbers dragged the markets down. Continued selling by foreign institutional investors (FIIs) amidst a weak global trend and depreciation of the rupee vis--vis the US dollar also added to the losses. FIIs net sold equities worth Rs 129 cr in December, sharply lower than the net selling of Rs 4,540 cr in November. Losses were capped to some extent on hopes of a halt in the RBI's monetary tightening after primary article inflation fell to multi year low level (latest primary article inflation is 2.47 as of weekended Jan 07). Buying in export oriented technology stocks on hopes of increased revenues due to the rupee depreciation also helped cap losses; CNX IT was the only sectoral index to end positive in the month due to this buying. Among negative sectoral indices, CNX FMCG index lost the least, down 0.5% in the month as investors locked into defensive sectors amid prevalent volatility. CNX Infra and CNX Realty declined the most, down over 12% in the month on worries of slowdown in the domestic economy.
Absolute Change
-669 -208
% Change
-4.15 -4.30
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Indicators 10 Yr Gsec
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Note:- The month-end portfolios and quarterly average assets under management (AUM) as of December have been considered for the report.
Source: AMFI
Category/Index returns Large Cap Funds Diversified Equity Funds Small and Midcap Funds Balanced Funds Monthly Income Plans Long Term Gilt Funds Long Term Debt Funds Ultra Short Term Funds Liquid Funds CRISIL Gold index
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The Indian mutual fund industry's quarterly average assets under management (AUM) fell by 4.4% or Rs 31,035 cr to Rs 6.81 lakh cr in the October-December quarter as compared with Rs 7.13 lakh cr in the July-September quarter (excluding fund of funds). On a month-on-month basis, mutual funds' AUM fell around 10% in December to Rs 6.11 lakh cr witnessing outflows of Rs 63,421 cr in the month the highest since March 2011. Almost 80% of the outflows (Rs 48,839 cr) were from money market funds following withdrawals by corporates and banks to meet quarter-end requirements. Corporates withdrew from mutual funds to meet advance tax payments in December while banks pruned their exposure to meet balance sheet requirements on capital adequacy. Further, an RBI circular requires banks to reduce exposure to short maturity debt funds by end January 2012. Equity mutual fund assets fell by over 5% to Rs 1.61 lakh cr as of December 2011 mainly on account of mark-to-market losses as the S&P CNX Nifty fell by over 4% in the December on weak global cues and downbeat domestic sentiments.
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24 of the 44 fund houses witnessed a fall in their average quarterly assets as per AMFI numbers. Reliance Mutual fund witnessed the highest fall in absolute terms with its average AUM declining by Rs 8,355 cr or 9.22% to Rs 82,306 cr in the December quarter. HDFC Mutual Fund retained its top average AUM position across fund houses in December with a corpus of Rs 88,600 cr, down Rs 3,200 cr or 3.48% from the September quarter. The share of top 5 mutual funds' assets was 53% in the December quarter while the share of top 10 funds' assets was 77%; bottom 10 fund houses continued to occupy less than 1% of the AUM. Among key regulatory developments in the month, SEBI rejected a suggestion by asset management companies to appoint an external agency to audit distributors and independent financial advisors. A SEBI panel recommended giving a break-up of the mutual fund fee structure, known as expense ratio, as well as excluding service tax from the expense ratio. SEBI also said that mutual funds should cut down the number of schemes as many of them were dormant.
Fund news
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Natixis Global Asset Management acquired a 25% stake in IDFC Asset Management Company and IDFC AMC Trustee Company. Japanese asset management firm Nikko and India's Ambit Group rework their partnership for the domestic mutual fund business. The new joint venture will be 51:49 with Nikko getting a higher share; the earlier shareholding structure of 74:26 has been cancelled. Bank of India is set to enter the mutual fund industry with its buyout of a 51% stake in Bharti AXA Mutual Fund.
Fund focus
HDFC Cash Management Fund Treasury Advantage Plan (CRISIL Mutual Fund Rank 1)
HDFC Cash Management Fund - Treasury Advantage Plan, launched in November 1999, is among the top performing funds in the ultra-short term debt fund category as per the CRISIL Mutual Fund Ranking for the quarter ended December 2011. About the Fund The fund has an average AUM of Rs.16,667 cr as of December 2011. The fund has been ranked CRISIL Mutual Fund Rank 1 (top 10 percentile) in ultra-short term debt category for past six quarters due to superior returns and good portfolio management. Performance The fund has outperformed its benchmark (CRISIL Liquid Fund Index) across all the time frames, i.e., 1, 2 and 5 years. Also, its performance is almost in line with peers (see Table 1). Further, the fund's volatility of returns as measured by standard deviation (0.02%) is lower than the category average (0.08%) for a one year period ended December 2011.
Table 1: Fund vs. Peers and Benchmark Performance as on 30th December 2011
Debt Long IDFC Dynamic Bond Fund SBI Dynamic Bond Fund UTI Bond Fund 1.77 2.13 1.59 3.72 4.48 3.10 6.31 10.95 6.79 11.65 6.16 11.21 3.24 6.91 3.63 7.93 3.25 8.58 26-Jun-02 9-Feb-04 18-Jul-98 128.60 70.33 311.16 2.11 1.73 1.55 0.67 2.33 1.57
Debt Short AIG Short Term Fund - Retail HDFC Short Term Opportunities Fund JPMorgan India Short Term Income Fund Religare Credit Opportunities Fund 0.78 0.72 0.79 0.74 2.25 2.22 2.45 2.28 4.53 4.50 4.95 4.54 9.53 9.26 9.50 8.94 7.12 NA NA NA 7.19 8.38 7.91 6.76 6-Mar-08 24-Jun-10 26-Mar-10 31-Aug-09 113.05 49.39 364.40 623.23 0.30 0.08 0.06 0.13 4.99 11.19 19.47 5.26
Gilt Birla Sun Life Govt Securities Long Term Plan UTI Gilt Advantage Fund - Long Term Plan 1.85 2.07 2.89 2.08 4.44 3.74 6.98 11.38 7.81 0.09 9.48 7.96 17-Nov-99 28-Jan-02 273.95 128.17 3.02 2.56 1.72 0.97
Liquid HDFC Liquid Fund Principal Cash Management Fund Reliance Liquid Fund - Cash Plan 0.74 0.76 0.73 2.26 2.27 2.22 4.49 4.54 4.50 8.82 8.94 8.97 6.41 6.44 5.26 6.70 6.87 5.39 17-Oct-00 10168.04 1-Sep-04 7-Dec-01 1077.66 1673.25 0.03 0.02 0.02 18.03 24.06 31.18
Ultra ST Baroda Pioneer Treasury Advantage Fund Birla Sun Life Floating Rate Fund - Long Term Birla Sun Life Ultra Short Term Fund - Retail 0.76 0.77 0.75 2.33 2.27 2.26 2.10 2.21 4.63 4.59 4.54 4.23 4.51 9.20 9.18 9.01 8.61 9.01 NA 7.84 6.51 6.47 6.43 6.89 7.09 6.79 6.97 6.96 24-Jun-09 5-Jun-03 25-Apr-02 547.36 174.14 1182.67 0.02 0.16 0.05 0.02 0.03 37.36 6.21 13.73 16.48 24.65
Period HDFC Cash Mgmt Fund Treasury Advantage Plan Peer Average CRISIL LiquiFEX
6 Months 1 Years Annualized Annualized 4.23 4.40 4.07 8.61 8.82 8.17
Portfolio Analysis
Asset Quality Investors look up to this fund category for safety, liquidity and returns, in that order of preference. In the past one year, highest rated securities, treasury bills and net receivables accounted for 99% of the fund's portfolio (see Chart 1).
Chart 1: Rating Profile of Fund
HDFC Cash Management Fund - Treasury Advantage Plan 0.69 SBI Short Horizon Debt Fund - Ultra ST Fund - Retail 0.74
CRISIL Mutual Fund Ranks as of December 2011 Point to Point Returns are as on December 30, 2011 Returns are annualised for periods above 1-year, other wise actualised Risk Ratios are annualised For Sharpe Ratio the risk free rate is 6.65% - the average 91-day T-Bill auction cut-off rate for two years Average AUM is 3-months average number as disclosed by AMFI for the period Oct-December 2011 Risk ratios for Debt ST, Liquid and Ultra ST categories are for a period of 1 year; risk free rate: 7.98%
CREDIT QUALITY High Medium Low High INTEREST Medium RATE Low SENSITIVITY
For a detailed write-up on the CRISIL Mutual Fund Ranking and the complete ranking list, please refer to www.crisil.com.
31.8% A1+/AAA and equivalent Net receivables T-bills Others
Average Maturity The fund has consistently maintained a lower average maturity vis-vis its peers for the past one year indicating lower interest rate risk in the portfolio vis--vis the peer set (see Chart 2).
Chart 2: Average Maturity of Fund vs. Peers
Average Maturity in Days
120 100 80 60 40 20 0
HDFC Mutual Fund Reliance Mutual Fund ICICI Prudential Mutual Fund Birla Sun Life Mutual Fund UTI Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund DSP BlackRock Mutual Fund Kotak Mahindra Mutual Fund IDFC Mutual Fund Tata Mutual Fund Sundaram Mutual Fund Deutsche Mutual Fund Religare Mutual Fund Fidelity Mutual Fund Axis Mutual Fund Canara Robeco Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund LIC NOMURA Mutual Fund IDBI Mutual Fund HSBC Mutual Fund
88737 84300 69472 60406 57817 42108 37312 30565 30203 26864 21473 14775 13314 11818 8880 8631 7356 6915 6759 6223 6102 4897
91827 90661 75217 64217 62580 47731 34410 30084 32101 28908 22634 15110 12761 11042 9120 7545 6920 6468 4748 7075 4926 4952
BNP Paribas Mutual Fund L&T Mutual Fund Taurus Mutual Fund Baroda Pioneer Mutual Fund Peerless Mutual Fund
5243 4135 5367 3399 5608 4358 4536 1971 1505 1036 NA 789 723 447 869 456 447 278 206 157 176 NA 712742
-438 481
-8.35 11.62
-5624 -11.78 2901 481 -1898 -2044 -1160 -335 554 775 -239 1087 436 447 2011 8.43 1.60 -5.91 -7.07 -5.13 -2.22 4.34 7.02 -2.62 14.40 6.30 6.91 42.36
Goldman Sachs Mutual Fund 4349 PRINCIPAL Mutual Fund Morgan Stanley Mutual Fund Pramerica Mutual Fund ING Mutual Fund Indiabulls Mutual Fund Daiwa Mutual Fund AIG Global Investment Group Mutual Fund Edelweiss Mutual Fund Union KBC Mutual Fund Sahara Mutual Fund Mirae Asset Mutual Fund Motilal Oswal Mutual Fund Escorts Mutual Fund Quantum Mutual Fund Bharti AXA Mutual Fund IIFL Mutual Fund Grand Total 3942 2086 2084 1559 1308 858 718 576 540 473 422 232 205 179 161 26 687639
-594 -13.10 115 580 523 NA 69 -5 128 5.82 38.51 50.50 NA 8.76 -0.64 28.71
Feb-2011
Mar-2011
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Oct-2011
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Jan-2011
Period
Liquidity Liquidity is an important parameter for assessing ultra-short term debt funds. Illiquid securities hinder the fund's ability to liquidate the portfolio during times of heavy redemptions. The fund is in the top cluster of the liquidity parameter vis-a-vis the peer set as per CRISIL Mutual Fund Ranking of December 2011. Conclusion Retail investors can look at ultra-short term debt funds from the perspective of safety, liquidity and returns. Fund Manager Mr. Anil Bamboli holds an MMS degree (Finance) and is also a CFA from the CFA Institute, USA.
Every month, Fund Focus will feature one of the CRISIL Mutual Fund Rank 1 Schemes
Nov-2011
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Jun-2011
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Last updated: 30 March, 2011
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