In the long-term, your investments in ELSS can well translate into a huge retirement corpus, said Dhirendra Kumar, CEO, Value Research, in an interview with ETNOW. Edited excerpts:
It is that time of the year when all of us are scrambling to save that extra penny. What advice would you give to our viewers who are watching and who are looking at saving and planning their taxes for the fiscal ahead?
All kind of tax saving alternatives are available and in fact 80C is very crowded for most earning people. It gets stacked or filled with your mandatory deductions like the employee provident fund as well as the voluntary PPF contributions. Besides that, you have all kind of expenses which are possible deductions like tuition fee for your children.
If you are still left with any window to invest which will save you taxes, you must. Looking at the investment alternatives for tax saving and leaving aside the deductable expenses, I would say all other alternatives, except ELSS, are either fixed income or hybrid. They come with their own tricks.
If somebody is barely able to save and invest just to save taxes, ELSS could well turn out to be the most rewarding alternative simply because this is the only all-equity option.
We have a general tendency to wait till the last minute. Ideally one should be making these investments in a planned manner. One should be doing SIP from April through the whole financial year so that you do not have to worry at the last minute, or you are not being threatened by your accountant with a huge salary deduction if you do not provide the proof of tax-saving investments in the month of March.
But I would say that even if you do your tax-saving investment in the month of March, and you are doing it for 10-15-20 years, it is similar to doing an annual SIP. The long-term nature of such investments can well turn out to be a huge retirement corpus, if this is the only investment that you make.
Apart from the first criteria that you spoke of, one needs to do this well in advance and not scramble at the last minute, equity is fairly risky. It can be volatile in the short term. It has the potential to offer superior returns over the long haul. What criteria should investors keep in mind while putting money into an ELSS?
All my equity investment evaluation is primarily driven by the thinking behind the returns being generated and keeping that in mind, I would like most funds to be very well diversified. It is a very well articulated strategy and all that should translate into at least three-four years of superior risk adjusted performance and also reasonable absolute performance.
I really do not care about short-term significant underperformance because for superior risk adjusted performance and long-term returns, you may have to withstand substantial poor performance for a brief period. In ELSS, it is all the more important because once you invest in it you get stuck for three years. In any other open-end fund, you can take your money out.
But the fact that you cannot withdraw in an ELSS actually turns out to be fairly rewarding. Once investors are forced to get stuck for three years, it normally ends up being well.
In fact, the worst performing period of ELSS funds have also been superior than the public provident fund returns. So, there lies the proof. Do not panic and do not look at short-term performance. Anyway one should be looking at it for more than three years which is the mandatory lock-in period.
Can you just walk us through your picks of top ELSS funds?
Yes, I like quite a few funds and if I have to really list four of them which have been able to deliver the best risk adjusted returns, they are Aditya Birla Sun Life Tax Relief 96, Mirae Asset Tax Saver, Motilal Oswal Long Term Equity and Axis Long Term Equity.
Mirae Asset and Motilal Oswal Long Term Equity Fund: They are relatively new, not even five-year old but what is likeable about them is of course during this period they have been able to deliver superior risk adjusted returns. Mirae Asset has a very high quality portfolio. The core of the portfolio is anchored 70% in large caps. It keeps away from the very racy part of the market and has done exceedingly well.
Motilal Oswal is a focused portfolio. It has a large cap portfolio of late but that is not the charter and if somebody is looking at making just one tax saving investment and thinking of being rich over the next 15-20 years, this is a strategy which might work out. It can also be extremely disappointing in the near term but it does not matter because when you invest in a tax saving fund, you get stuck for three years anyway.
Axis Long-Term Equity Fund is another one with a longer history. It is entirely into large caps. It has a very resilient portfolio and for conservative investors, it has turned out to be a very well rewarding fund. Of late, we have talked about how large cap funds have lost their plot and that they are unable to beat their benchmark. This is a fund which has been able to beat the benchmark even in the recent times with greater diversification while the benchmark was able to derive all its return from a very narrow base. Three-four stocks were doing exceedingly well in 2018. While everybody struggled, this fund did not. So, there is a long-term ability to beat benchmark with a large cap portfolio. A very steady portfolio is the charm of this fund.
Aditya Birla Sun Life Tax Relief Fund has its ups and downs but eventually turns out to be substantially rewarding if you are looking at five-seven years and can afford to ignore when it is not doing well. It is well worth it, it rewards for all the underperformance.