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Thursday, February 23, 2012

Take care before investing in ELSS schemes

Don’t blindly follow MF ratings and dividend payouts history while investing in ELSS

As the year-end nears, many of you shall be investing in EquityLinked Saving Schemes to save tax under section 80 C of Indian IT Act.  Many of you must have zeroed-in a scheme to invest.
But wait,
just blindly investing in a single ELSS schemes which boasts good ratings stars awarded to them by top-notch mutual fund rating sites could jeopardize your investment.
Do you remember how ratings and performance of Principal Personal Tax Saver scheme (a dividend scheme) in the FY 2007-2008 ? It was one of the top-ten ELSS schemes in terms of returns and many MF rating sites adorned the scheme with stars.

The scheme had progressively declared whopping 820%  (110%+110%+400%+200%) dividends in the  financial year 2007-2008 and having seen that many investors ended up investing their full ELSS allocation in that scheme.
Scheme declared last dividend on 25/3/2008 (Record date). And as many investors invest in last days of the financial year if someone had invested in the scheme on 31/3/2008, let’s see where does he stand now?

The scheme never declared dividend since then and NAV remains almost same (as of today).
This means investor has not earned anything in past 4 years and had he invested in Tax saving FDs instead, he would have earned overall return of 40%.

If we compare the aforesaid scheme with peers like HDFC TaxSaver-D and SBI Magnum  Tax Gain-D schemes then these schemes have consistently given dividends of { 40%,60%,60%} and {28%,40%,40%} respectively (after 31/3/2008).

What is interesting to note that both HDFC Tax Saver-D and SBI Magnum Tax Gain Scheme-D and their (growth option counterparts too) were not in the top-ten list in FY 2008. 

Let’s check the performance of Top-ten funds of FY 2008 (return-wise as in Feb 2008)

Scheme (All Growth Except PPTS)
One year Return as in Feb 2008
Returns since 31 march 2008
Current name of the scheme

Taurus Libra Tax Shield
59 %
Taurus Tax Shield

DSP ML Tax Saver Fund
DSP BR Tax Saver Fund

Lotus India Tax Plan
Religare Tax Plan

DWS Tax Saving Fund
36 %

Sundaram  BNP Paribas Tax Saver Fund
26.77 %
Sundaram Tax Saver

Escorts Tax Plan
Sahara Tax Gain
Kotak Tax Saver
Principal Personal Tax Saver
(Dividend Scheme)
.76 % & no dividend since then

What we learn from the aforesaid analysis is nothing but the multiple-times heard cliché- ‘past performance of the fund is not an indicator of future performance’ and a few of them only have been delivering consistent results.
So what should investors do to protect himself from the variation in the performance of schemes?
      (1)    The basic premise of every investment is the protection of the capital. And higher returns at the cost of invested capital should be categorically avoided.

      (2)    Every investor should first decide how much tax saving investment he can allocate to ELSS. This decision is personal and highly depends on the risk appetite of the investor.
If in a particular year,overall broader market underperforms then you can’t expect ELSS schemes to come up with fabulous results. Returns in equity are more because equity comes with higher risk in comparison with debt.
This is why one should allocate funds towards ELSS as per his risk appetite.

       (3)    Having set the ELSS allocation he should diversify his investment across 4-5 best performing ELSS schemes. Many advisors shall tell you to abstain from over-diversification in ELSS but we have seen above how dangerous it could be if single-scheme investment goes wayward. Diversification ensures that even if one or two of ELSS funds of your portfolio underperform, other schemes shall make up the loss.

      (4)    Investor generally should avoid dividend reinvestment option in ELSS.

      (5)    If someone goes for SIP mode for ELSS schemes he should be well aware of its intricacies.


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