Here we list out the best funds available in the tax-saving category.
The funds are given a star rating (five being the highest and one being the lowest) based on the return they deliver and the risk they take to get that return.
The Net Asset Value is as on April 25, 2006.
This fund continues to be the first choice.
In its history spanning over 10 years, the fund has displayed tremendous ability to race ahead during the good times, while protecting the downside (drop in NAV) well when the stock market fell. The fund has been doing this consistently year after year.
In the nine completed calendar years of its existence, the fund marginally under-performed its category only in 2002. This means that it gave returns less than that of the average ELSS. On the flip side, it has beaten the average by more than 10% in each of the remaining years.
This year, as on April 7, the fund is up 26.68%, ahead of an average peer's 22.72%.
The fund has been quite selective in its stock picks in which it invests with conviction. The number of stocks in the portfolio is generally restricted to 20-25 (though of late, that has gone up to 30).
The top five stocks account for more than 30% of the total investments with Hindustan Zinc being the top holding.
This fund is a top-of-the-mind pick and has never been rated below four stars.
HDFC Long Term Advantage
This fund has had a dream run so far. With a portfolio laden with mid- and small-cap stocks, this fund has created enormous wealth for investors. An over 50% annualised return since launch in December 2000 make it one of the huge successes in the tax planning funds category. In the five-year period ending April 7, it delivered a 56.71% annualised return, the best amongst other tax saving funds.
Tushar Pradhan, who became the fund manager in September 2004, is constantly trying to improve the quality of the portfolio. Till late 2004, the fund kept nearly 85% of its total investments in mid- and small-cap stocks. When the market touched a historic high, the fund sold some of these stocks and began investing in large-caps.
Today, the fund has invested in around 40 stocks with nearly 40% of total investments in large caps and the balance in mid-caps.
One of the arguments traded against the fund is that it has yet to see a market downturn. But its agility and ability to protect returns in whatever little opportunities it got makes one confident enough to invest here.
Like its name, this fund deserves a worthy look for the long-term investor.
This fund has buried its miserable past to emerge as one of the most tempting options in this category. The recovery has been nothing short of breathtaking.
The fund had a two-star rating in March 2005 and today has a four-star rating.
Magnum Taxgain has been one of the greatest beneficiaries of the ongoing bull run. In fact, it's this bull run that helped the fund regain its lost glory. Under the able guidance of fund manager Sandip Sabharwal (not with the fund anymore), the fund started to blossom in 2003 and since then has produced exceptional returns.
In the three-year period ended April 5, 2006, it gave an annualised return of 114.19%. The next fund followed with a 98.02% gain while the average returns during that period were just 72.48%.
Having said that, we feel that one be ready to take some risk and stomach bumpy rides as a trade-off for huge returns. The stress on mid- and small-cap stocks is bound to increase the volatility.
But, the fund management has displayed a knack of picking up winners time and again.
The biggest concern here is the absence of Sabharwal and three manager changes since he left the fund house in November last year. While the fund continues to do well, the fund management has brought in crucial changes.
Large-cap stocks have started to come back in the portfolio and diversity has increased.
Also, the top five holdings under Sabharwal comprised of 27.24% of the fund's total assets (total amount of investments being handled by the fund) in October last year. Now, it has reduced to 16.37%.
These steps sound logical and may help the fund check on the losses if something unfortunate happens in the stock market.
Prudential ICICI Tax Plan
Prudential ICICI Tax Plan continues to be a high-risk, high-return proposition. It packs some real punch but may prove to be unnerving to investors who prefer stability rather than flashy returns. Therefore, conservative investors may do well to skip this fund altogether.
Here you get a portfolio clearly tilted towards small- and mid-caps and at times, they comprise over 90% of the portfolio.
The fund manager loves to try out stocks but the buy-and-hold strategy does not seem to be his priority. For example, the fund manager has changed nearly 85% of the portfolio in the last one year. So invest in this fund only if you are comfortable with such aggressive strategies.
Over the years, it has consistently outperformed an average peer. In the three-year period ended April 4, 2006, it had an annualised return of 96.32%. And, for the five-year period, it was 55.63%.
The fund has become highly diversified with as many as 59 stocks in February this year. While this may sound too diversified, it may not be a bad idea given the consistent rise in the market.
Franklin India Taxshield
With a minor change in strategy, this long-term winner is back on track. Today, the returns look much more attractive than a year ago.
Till 2004, out of its total portfolio, close to 70% was invested in large-cap stocks. This resulted in a dull performance. However, in the last one year, the fund has pledged more than 40% of its portfolio to mid- and small-cap stocks and the result is here for everyone to see.
In March, the fund went all out after technology stocks the exposure increased from 11.34% to a massive 29.89%. In February, the fund had sold all its Infosys shares but bought them back in March. Satyam Computers too staged a comeback. The fund has also more than doubled its investment in TCS and HCL Technologies.
The average holding period here is nearly 17 months (time from which it buys a stock and sells it) which looks much better than some of its peers who churn their portfolio every six months.
Historically, the fund has generated outstanding results an annualised return of 42.79% since launch in mid-1999 is a testimony to this.
This year, till April 7, the fund generated a 24.21% return to race ahead of the average return given by other ELSS funds of 22.72%.
Great management, low volatility, buy-and-hold strategy, a well-diversified portfolio and an ability to protect downside (drop in NAV when the stock market falls), makes this fund one of the finest options in the tax-planning category.