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The best tax saving funds

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November 29, 2005 08:53 IST

In Why you must invest in ELSS funds, we spoke about the returns delivered by tax saving mutual funds and why they make for a smart investment option.

Today, we look at the five best funds to park your money in.

Franklin India Taxshield

This one may look dull when compared to some of its flashy peers. Nevertheless, it remains one of the finest options in this category.

An outstanding long-term performance record coupled with extremely low volatility makes this fund apt for any tax-planning portfolio.

The fund's average performance in recent times should not worry investors. Of course, it has lagged behind some of its aggressive peers, who have earned hot returns through mid-cap and small-cap stocks. But, the consistency of this fund is hard to beat.

This fund can be your best friend in uncertain times.

In 2000, when all tax saving funds lost 22.58% on an average, this one gained 2.11%.
In 2001, when the funds lost an average of 20.49%, this fund lost just 13.33%.

Through its life, it has almost always outperformed the average returns of its peers in tough times.

From 2002 onwards, it has been delivering good returns.

The fund manager believes in buying and holding on to the stock. The average life of a stock (time the fund manager holds onto it before selling it) has been a healthy 18 months. Stocks like Infosys, Grasim Industries and Hindalco have now become permanent members of the portfolio.

Currently, the fund manager has a portfolio of around 45 to 55 stocks. It's large-cap focus and ability to protect the downside (when the stock market falls) makes this fund a worthy choice.

HDFC Long Term Advantage Fund

With a portfolio laden with mid-cap and small-cap stocks, this fund has delivered an outstanding performance since its launch in December 2000.

Starting as a large-cap oriented fund, it soon realised the potential of mid-caps and small-caps. By August 2002, it began investing heavily in them. The fund ended that year as the hottest fund in the category.

Over the next two years, the exposure to mid- and small-caps increased to over 80% of the total portfolio (all the investments).

The fund has marginally changed its focus right now. With equity markets at their all-time high and more volatility, it has now invested more in large-cap and quality mid-cap stocks and cut down substantially on small-caps.

This fund is a worthy choice for all long-term portfolios.

HDFC Taxsaver

This fund offers a rare combination of low risk and high returns. One of the least volatile funds in the category, HDFC Taxsaver has delivered an awesome 43.07% annual return since launch in March 1996.

The recent bull run has strengthened the fund's superlative track record.

In 2003, it delivered a return of 121.06% and in 2004, it delivered a return of 49.38%. Till October 26, 2005, the fund had raced ahead to give a return of 50.72% while the average return of its peers was 29.06%.

What makes this fund special is not how it exploits the booming stock market but the way it manages downside risk (when the market falls).

The year 2002 was the only rough patch in an otherwise sparkling track record of the fund. High investments in public sector undertakings and FMCG stocks and a low allocation to mid-caps dented its performance. Since then the fund has never looked back.

In recent times, the fund began investing in relatively risky but rewarding mid- and small-cap stocks. Now, with the stock market reaching such levels and turning volatile, the fund has once again started investing in large-cap stocks.

An admirable performance record, low volatility and the ability to protect returns in a bearish market make the fund special.

Magnum Taxgain

The oldest ELSS fund has earned enormous wealth for its investors in the last two years.

Till mid-2003, the fund had a depressing past. Since launch in March 1993, it gained a paltry 5.09% a year till June 2003. Since then, its performance chart has seen an unprecedented rise and the fund has earned an annualised return of 104% between mid-2003 and October 2005 and is miles ahead of its average peer's 56.72% return during the same period.

A greater emphasis on some well picked mid- and small-cap stocks is behind the fund's sensational turnaround.

Some of its engineering and chemical picks have performed exceptionally well during the period. Stocks like Thermax, Praj Industries, Havell's India, Crompton Greaves and United Phosphorous proved to be lucrative investments.

As on October 31, 2005, the fund had gained 69.72% since the start of the year, more than the average returns of its peers of 27.22%.

The fund has had its share of pain and 2000 and 2001 were the most painful period in its life. It is an aggressive fund where the fund manager does not hesitate to take huge stock-specific or sector-specific bets. Therefore, you get high returns but high volatility too.

Prudential ICICI Tax Plan

If sharp ups and downs in the Net Asset Value make you fret, ignore this fund. This fund is highly volatile and susceptible to market swings. However, those who keep the faith here are rewarded suitably.

The fund had a disastrous start in August 1999. It suffered huge losses when the tech boom crashed in 2000 but staged a strong comeback. 

In 2001, when on an average its peers lost 20%, this fund lost just 6%. In 2002, it did not fare as well but delivered a 150% return in 2003 and 36.46% return in 2004.

The fund manager's ability to pick opportunities among lesser-known stocks early enough is praiseworthy. At times, the fund has taken huge concentrated bets.

Even exposure to small-caps has touched a high of 66%. But, the fund tries to mitigate the risk of investing in small-caps by investing across various stocks and sectors.

Value Research


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Value Research