Analysis - ELSS Funds

As everyone starts to plan for tax-saving towards the end of the year, one may have several questions in his/her mind on where to park his/her money for tax-saving as well as better returns. The current economic environment offers adequate room for growth for ELSS funds and hence I would stick to suggestions under this domain.

I wouldn’t discuss absolute performance or ratings in this section as that is generally covered in most of the popular financial portals like http://www.valueresearchonline.com and http://www.easymf.com/

However, I would analyze some funds and suggest why I would buy/not buy in the current environment.

1. Fidelity Tax Advantage

Fund Manager: Sandeep Kothari
Since: Jul – 2006

I like the fact that the fund manager is experienced and has stuck to the fund for a reasonable period of time. This brings some amount of trust on the performance of the fund.

Asset Allocation
As on 31/08/2008
Equity 88.61%
Debt
Others 11.39%

The fund as on 31st September 2008 increased holdings in Infosys Tech (3.48%), Bharti Airtel (3.05%), ICICI Bank (2.8%), Hindustan Unilever (2.55%) and HDFC Bank (2.22%) amongst the top ten holdings. It reduced exposure in Reliance Industries (6.44%), HDFC (4.09%), SBI (3.24%) and BHEL (3.09%).

Given that the fund has significant equity exposure and lower cash/debt position, the fund is bound to loose in a falling market. The fund manager has taken smart calls in reducing exposure to RIL and other stocks as stated; however, the fund still has high exposure to RIL. I am particularly bearish on RIL and other stocks held in the portfolio as they would be the most to fall in a falling market. This portfolio suites investment once the market stabilizes. For the present, I would like some cash exposure and adequate equity cushion (FMCG and Pharma).
Investment Valuation Stock Portfolio

Portfolio P/B Ratio 5.55

Portfolio P/E Ratio 23.14

The funds P/E and P/B ratio are still high which means the downside risk is higher.

2. Franklin India Taxshield

Fund Manager: Anand Radhakrishnan
Since: Apr – 2007

The fund manager has been around for a lesser period of time. However, it’s not an alarm signal as the fund hasn’t changed its style of declaring dividends on a regular basis when the markets were ripe. I like the dividend distribution policy of the fund which reduces risk in long term.

Asset Allocation
As on 31/08/2008
Equity 92.68%
Debt
Others 7.62%

The fund increased its holdings in Bharti Airtel (7.16%), RIL (6.12%), BHEL (4.49%) and L&T (4.3%) while reducing exposure to Infosys Tech (6.04%) and HDFC (5.7%). I’m extremely bearish on all the top stocks held by the fund. The fund manager has done well to increase holdings in “cushion” stocks like Nestle, Hero Honda and Marico. However, I would have like higher allocation to these stocks rather than the old performers which the fund manager still seems to betting on! The equity allocation is significantly higher at 92.68%, which presents good amount of downside risk.

I am partly happy on the fund managers actions, hence would recommend a part-buy.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 6.90

Portfolio P/E Ratio 22.88

P/E and P/B is high for the fund and hence the risk id higher.

3. Sundaram BNP Paribas Taxsaver

Fund Manager: Satish Ramanathan
Since: Sep - 2007

The fund manager has been around for a lesser period of time. However, he brings in good amount of experience having worked with Franklin Templeton MF for a long period of time. I have tracked his performance during his tenure in Franklin Templeton and have found it to be satisfying.

Asset Allocation

As on 31/08/2008
Equity 63.64%
Debt 7.61%
Others 28.75%

The fund has substantial cash/call/debt allocation which is one of the reasons for outperformance over the previous month. However, as I see during the later days of October, the fund has been underperforming the markets and some other peers in the group. I suspect some equity re-allocation or portfolio shift. During the month of September, the fund increased exposure in HUL(4.86%), ITC(4.36%), RIL(3.94%) and ICICI Bank(3.02%) while reducing exposure in Nestle(3.81%) and Tata Tea(3.18%). Given the cash exposure as on September '08 portfolio, the fund is a good defensive bet and a good addition to your ELSS portfolio.

I’ll check the funds October portfolio once it releases and then take a final call.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 6.43

Portfolio P/E Ratio 16.47

The fund has a reasonable P/E ratio and hence is suitable for investment.

When to Buy?
Given that ELSS has significant equity exposure, they are governed by equity market movements. Hence, I would recommend investors to keep a watch on support levels discussed in the blog and invest closer to support. For instance, the next Nifty support looks to be at 2663. Another way of looking at it is to look at the support levels of top ten stocks held my MFs and then invest closer to those levels. But this can get very complex and hence I would say, just look at the Nifty close and invest. You can probably phase your investments over the months of November, December and January. However, I don’t recommend an SIP way of investing as of now. SIP’s if you note, have underperformed the market over the last two years.