Consequent to the recent Budget, tax-saving funds (also referred to as ELSS) are likely to emerge as favourites with a large number of investors.
If you are an investor with a flair for market-linked investment avenues and utilised the Rs 10,000 investment limit under the erstwhile Section 88; the good news is that the limit now stands enhanced at Rs 100,000 under Section 80C. As a result the annual tax-planning exercise can now be conducted in sync with your risk appetite.
We at Personalfn have been rather ardent supporters of tax-saving funds. Apart from providing the much-needed impetus to tax planning, the 3-year lock-in period also ensures that investors stay invested over the longer time frame which is ideal for equity-oriented investments.
Another argument in favour of tax-saving funds is that the fund manager can afford to take long-term calls and not worry about redemption pressure or short-term movement in the net asset value (NAV).
With so many positives in favour of tax-saving funds, it would make an interesting study to find out how they compare vis-à-vis conventional diversified equity funds.
For the purpose of this comparison we have chosen the top 10 performers from both the aforementioned categories over a 3-year time frame.
Diversified Equity Funds: Blistering growth!
| Diversified Equity Funds | NAV (Rs) | 6-Mth | 1-Yr | 3-Yr | Incep. |
| RELIANCE GROWTH | 123.33 | 33.6% | 57.6% | 69.5% | 30.4% |
| RELIANCE VISION | 88.45 | 24.1% | 36.0% | 63.4% | 25.8% |
| FRANKLIN INDIA PRIMA | 118.04 | 32.9% | 56.9% | 63.0% | 24.3% |
| MAGNUM CONTRA | 16.21 | 37.6% | 68.8% | 55.5% | 27.1% |
| TATA EQUITY OPP. | 28.97 | 22.1% | 31.8% | 52.5% | 8.7% |
| MAGNUM GLOBAL | 17.88 | 38.7% | 86.9% | 52.0% | 12.0% |
| TAURUS STARSHARE | 19.24 | 33.3% | 71.6% | 48.7% | 5.4% |
| HDFC CAPITAL BLD. | 36.82 | 28.4% | 55.7% | 48.3% | 23.0% |
| DSP ML OPP | 26.57 | 21.4% | 27.1% | 47.6% | 25.2% |
| UTI MASTER VALUE | 19.58 | 17.7% | 25.0% | 47.4% | 28.6% |
Top performing diversified equity funds have pitched in an impressive performance over the 3-year period. Reliance Growth (69.5% CAGR), Reliance Vision (63.4% CAGR) and Franklin Prima (63.0% CAGR) in particular have delivered noteworthy performances.
Tax-saving funds: Steady ascent!
| Tax-saving Funds | NAV (Rs) | 6-Mth | 1-Yr | 3-Yr | Incep. |
| HDFC LONG TERM ADV. | 49.07 | 23.2% | 52.6% | 59.3% | 45.2% |
| MAGNUM TAXGAIN | 39.36 | 50.2% | 83.9% | 56.6% | 16.8% |
| PRU ICICI TAX | 48.79 | 40.7% | 78.3% | 54.2% | 29.1% |
| BIRLA EQUITY PLAN | 38.09 | 28.4% | 38.3% | 53.2% | 30.3% |
| HDFC TAX SAVER | 69.04 | 39.2% | 65.6% | 51.6% | 40.3% |
| TATA TAX SAVING | 33.26 | 25.2% | 31.9% | 45.7% | 28.5% |
| SUNDARAM TAX | 13.53 | 29.1% | 60.9% | 44.4% | 20.3% |
| PRINCIPAL TAX SAVINGS | 39.27 | 25.1% | 36.3% | 40.9% | 20.4% |
| FRANKLIN TAX SHIELD | 69.22 | 24.2% | 28.7% | 40.0% | 38.8% |
| UTI EQUITY TAX SAVINGS | 18.39 | 21.4% | 26.3% | 36.9% | 20.7% |
Tax-saving funds have clocked impressive performances as well; albeit their growth figures are relatively stunted.
For example, the leading funds from this segment i.e. HDFC Long Term Advantage (59.3% CAGR) and Magnum Taxgain (56.6% CAGR) fail to match their respective counterparts in the diversified equity segment.
Rank top-performing tax-saving funds
Does this mean that tax-saving funds deserve thumbs down? Not at all! Tax-saving funds should form a part of your portfolio on the following grounds,
1. If tax benefits under Section 80C are factored in, the returns from investments in this segment would be significantly enhanced and even surpass those of conventional diversified equity funds.
2. As stated earlier, tax-saving funds offer investors the opportunity to conduct their tax-planning exercise in tune with their risk profiles.
3. The 3-year lock-in period enforces a degree of much-needed discipline in the investors' investment activity.
It ensures that an investor stays invested over the longer horizon which is the ideal way to make an equity-oriented investment. Investments in tax-saving funds can be utilised by investors to meet their medium to long-term investment objectives.
Our take on tax-saving funds is that they add value and should form a part of the risk-taking the investor's portfolio.
Having said that, investors still need to ensure that their ELSS investments are in tune with their risk-appetites at all times.
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