Edelweiss ELSS Fund

Tax-saving funds (also referred to as Equity Linked Savings Schemes - ELSS) are well suited for investors willing to take risk. However, at the same time it also provides an opportunity to create wealth in one’s tax-saving portfolio. Moreover, the lock-in period of 3 Years encourages long-term investing, which is a pre-requisite for fruitful return on equity investments. A well managed tax-saving fund can serve a dual purpose i.e. provide tax benefits (under Section 80C of the Income Tax Act, 1961) and assist investors’ to accumulate wealth over the long-term. But to do so, the key lies in selecting a well-managed tax-saving fund with a long term horizon.

Edelweiss ELSS Fund (EEF) is one such open-ended tax saving fund from the stable of Edelweiss Mutual Fund, which follows the blend style of investing. EEF is primarily mandated to invest in equities and equity-related securities of Indian companies along with debt and money market instruments. Launched in December 2008, the fund has been in existence for a little over 3 years now.

Investment Objective and Proposition

The fund’s primary investment objective is “to generate long-term capital appreciation with an option of periodic payouts at the end of lock in periods from a portfolio that invests predominantly in equity and equity related instruments. However, there is no assurance that the investment objective of the Scheme will be realized and the Scheme does not assure or guarantee any returns.”

The fund is mandated to invest 80% - 100% of its total assets in equity and equity-related securities and the rest (upto 20%) in domestic debt and money market instruments to manage its liquidity requirements.

Over the past one year, EEF’s exposure to large cap stocks has been in the range of 52% - 76%, while its exposure to mid & small cap stocks has ranged from of 17% - 44%. The fund’s exposure to debt and cash over the past one year has not been more than 15% which indicates its tilt towards staying invested in equities with occasional cash calls.

Equity Portfolio

Top 10 holdings (in %) on December 31, 2011
(Source: ACE MF, PersonalFN Research)

The Top-10 stocks account for 31.9% of the portfolio while top-5 sector concentration stands at 44.9%. EEF is benchmarked against S&P CNX Nifty, as disclosed on December 31, 2011.

Although the fund holds a portfolio which is diversified across sectors and across stocks within the sector; the fund manager has excessively churned the portfolio which is revealed by the higher turnover ratio of 3.61 times.

The Scheme follows the quant model approach of investing. Quant is an investment strategy and a business or financial analysis technique that seeks to select securities based on the attractiveness of an investment on certain predefined parameters.

The Fund identifies stocks for its portfolio which are across the entire spectrum of market capitalisation and, multiple sectors. But while identifying such companies, EEF pays specific attention to the following criteria amongst others:

• Good track record of the company
• Potential for future growth
• Industry economic scenario

How EEF has fared vis-à-vis its peers

(NAV data is as on January 19, 2012. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)

The table above reveals that EEF’s performance has not been very luring when compared to top performers in the category. The fund has also underperformed the benchmark index –S&P CNX Nifty. Over a 3-Yr time frame the fund has clocked moderate returns of 20.4% CAGR, as against the 20.8% CAGR returns generated by S&P CNX Nifty over the same time frame.

When assessed on the volatility front, EEF has exposed its investor to lower risk (as revealed by its Standard Deviation of 6.45%), and thus has been able to clock appealing risk-adjusted returns (as revealed by its Sharpe Ratio of 0.17) which are high than risk-adjusted ratio clocked by its benchmark – S&P CNX Nifty. However, a noteworthy point is that compared to the risk-adjusted returns clocked by the top performers in the category, the Sharpe Ratio appears quite middling. This, thus, makes EEF a low risk- medium return investment proposition as compared to its peers.

Fund Manager Profile

In a nutshell...

As seen above the performance of Edelweiss ELSS Fund has been quite middling especially when assessed on a risk-adjusted return basis and over a 3-Yr time frame. Also the fund’s tendency to churn aggressively makes it unsuitable for risk-averse investors. It is important to note that excessive churning results in higher costs which eat into the returns generated by the fund. The launch of the fund during the bear phase has enabled it to do some value picking for its portfolio, but performance going forward has to be watched carefully.

ELSS mutual funds can provide you with an excellent wealth creation avenue, apart from helping you avail the tax deductions. However, the investment in ELSS doesn’t come without risk and hence requires your attention at the time of selecting a fund. Investment done without proper assessment may prove to be a blunder if your selection goes wrong. Thorough research of available options may help you take a well informed decision.