Interesting and uninteresting funds

The cover story of 'Mutual Fund Insight' September 2022 issue is about eight interesting fund ideas. Essentially, we have picked out a group of funds, most of them of a type that do not fit often into one of the routine fund choice frameworks that we use. They are one-off or unique funds that are still worth considering for investors. Clearly, none of them are designed to be the core of your fund investment portfolio. You should read about them and if you find an idea interesting, you should invest some amount of your portfolio in them - not so much that the fund becomes the heart of your portfolio, and yet not so little that it's irrelevant.

They are an odd lot, with equity as well as debt funds amongst them. For those who are familiar with the Value Research philosophy of fund choice, at least one - SBI Magnum Children's Benefit Fund - will be quite a surprise. This is a nice equity fund run with a long-term perspective. However, it has some restrictions around the way you would invest in it and how it can be redeemed - you can read about those in the cover story of 'Mutual Fund Insight' September 2022 issue. It's unusual for Value Research to discuss a fund with such limitations but it does fit into a discussion on interesting and unusual funds.

In another part of this issue, you will actually find the type of funds that are at the other end of the spectrum of universal suitability - so much so that everyone should be investing in them regularly. I'm talking, of course, about tax-saver funds. Our Category Watch of this issue and the accompanying analyses of chosen funds is about ELSS funds. There's a kind of a convention in the media that ELSS funds must be talked about only in February of each year because that is 'tax time'. I find this ridiculous. This idea of making your tax saving at the fag end of the year makes any sense if you are investing only in fixed-income instruments like PPF and FDs.

We're doing this ELSS analysis now because it's always tax time for those who invest in ELSS funds. Equity-based investments like ELSS are different because like any other equity-based investments, they must be spread evenly through the year with SIPs. This means you should be investing in them continuously, adjusting the SIP amount early in each tax year to 1/12th of whatever your investment requirement is likely to be for that entire year.

Actually, in my experience, the utility of ELSS funds goes far beyond just tax-saving because they are a great way of getting the first taste of equity investing and of mutual funds. People invest in these funds because the tax-saving attracts them and they have the shortest lock-in among tax-saving investments. However, the three-year lock-in ensures (most of the time) that investors get the good returns even if their timing and choice of funds is less than optimal. This experience converts a certain proportion of these investors to investing in equity mutual funds over and above their tax-saving needs. Once you have a taste of long-term equity returns, then you end up trying other types of equity investments as well.

Even if you don't do that, the Rs 1.5 lakh a year itself can give a large benefit if held for a long time. Unless your goal is to withdraw tax-saving investments as soon as the lock-in ends, this Rs 1.5 lakh a year makes for an adequate lifetime of savings for a middle-class saver. It will not lead to a luxurious old age by itself, but it's a useful amount.

However, do pay heed to my warning about doing ELSS investments only through SIPs and leave the last-minute rush to PPF investors. If you do not do SIPs and are hit with a big loss because you invested in a lump sum, it could sour you on ELSS for a lifetime - and we definitely don't want that.

Suggested read:
It's always tax time
Make your tax-saving investments equity-based