It's that time of year again. When winter is fast changing into summer and the financial year draws to an end. So if you have still not completed your Section 80C investments, bring out the cheque book. You may find tax planning an incessant bore, but it is better to work on it than pay the government more than you are legally obliged to.
One of the options under Section 80C is investments in Equity Linked Saving Schemes (ELSS) - the tax planning mutual funds. When finance minister P Chidambaram hiked the investment limit from Rs 10,000 to Rs 1 lakh for such funds (Budget 2005), assets in this category shot up from Rs 684.01 crore in March 2005 to Rs 5,089.90 crore in March 2006. Hardly surprising! The lock-in period of just three years is a pleasant respite when compared with other tax-saving avenues like PPF (15 years) and NSC (six years). The returns too are more lucrative. The average annual return over the past five years has varied from 21 per cent to 161 per cent. Again, a far cry from the 8 per cent return offered by the above two instruments.
If you are wondering which fund to consider, here are four good options.
Birla Equity Plan
Barring 2004, the fund has had a good run since 2002. The ability to identify trends, make swift moves and go against the herd has paid off. For instance, unlike other funds, the October 2006 portfolio had Services and Financial Services in the top two sectors (35.95 per cent) with technology at less than 5 per cent of the portfolio. Today, auto and technology are the top two sectors (26.93 per cent) and the mid- and small-cap allocation is high at 64.64 per cent. The fund was badly hit in the recent crash and recorded its worst month (-14.36 per cent) and quarter (-9.72 per cent) as on March 7, 2007.
An excellent performer, this fund has performed well during good times and displayed resilience during the bad times too. In its entire rating history, the fund has never slipped below a 4-star rating. At one time, exposure to large-caps was huge and dropped dramatically in 2004. Since then it has risen and hovers in the 55 per cent range.
It has re-entered the financial services sector which it exited sometime back while exposure to the automobile sector has declined.
The fund has been the best performer in this category for the past three years. In the recent past, the fund has kept its mid- and small-cap allocation in check and is now at 57.59 per cent. The fund fared quite well in the current market crash and its year-to-date return of -6.04 per cent (as on March 9, 2007) was below the category average of -8.98 per cent. Not much of the portfolio has been revamped over the past four months. Though actual weightages have changed, only two stocks have been replaced in the top 10 list and the top three sectors have stayed the same though allocation to each of them has reduced.
Pru ICICI Tax Plan
The concentration to mid- and small-cap stocks (83.96 per cent) are testimony to the fact that this fund is a high-return, high-risk game. True to its aggressive portfolio revamping style, the fund has done a fair amount of churning. Technology occupies 10.66 per cent of its portfolio though four months ago it was 4 per cent. Textiles and diversified have been displaced from the top three sector spots to the current FMCG and chemicals. The stocks in the top 10 list too have changed with just four still featuring. Though its returns are luring, be prepared for the downside risk too.