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.
L&T Tax Saver Fund (LTSF) is one such open-ended tax saving fund from the stable of L&T Mutual Fund. LTSF is primarily mandated to invest in equities and equity-related securities along with debt and money market instruments. Launched in November 2005, the fund has been in existence for a little over 6 years now.
Investment Objective and Proposition
The fund’s primary investment objective is “to provide long term capital appreciation by investing predominantly in equity and equity related instruments and also enabling investors to get income tax rebate as per the prevailing Tax Laws and subject to applicable conditions.”
The fund is mandated to invest 80% - 100% of its total assets in equity and equity-related securities and the rest (i.e. upto 20%) in debt and money market instruments to manage its liquidity requirements.
Over the past one year, LTSF’s exposure to large cap stocks has been in the range of 71% - 89%, while its exposure to mid & small cap stocks has ranged from of 7% - 26%. The fund’s exposure to debt and cash over the past one year has never been more than 7% which indicates its tilt towards staying invested in equities. As per the portfolio disclosed on January 31, 2012, fund has allocated 88.8% towards large caps, a petite 7.4% in mid & small cap and has preferred to hold cash to extent of 3.8% of its total portfolio.
Equity Portfolio
| Holdings | Sep 2011 | Oct 2011 | Nov 2011 | Dec 2011 | Jan 2012 |
|---|---|---|---|---|---|
| Infosys Ltd. | 4.6 | 6.8 | 6.7 | 5.2 | 7.6 |
| Reliance Industries Ltd. | 6.5 | 5.7 | 5.5 | 3.8 | 7.5 |
| ICICI Bank Ltd. | 4.5 | 7.6 | 6.4 | 6.0 | 6.1 |
| State Bank Of India | 0.9 | 0.9 | 0.9 | 2.7 | 5.3 |
| HDFC Bank Ltd. | 4.0 | 3.0 | 3.0 | 3.0 | 5.0 |
| Larsen & Toubro Ltd. | 1.9 | 1.9 | 1.9 | 1.5 | 4.0 |
| HDFC Ltd. | 4.8 | 5.5 | 5.6 | 5.9 | 3.7 |
| Tata Consultancy Services Ltd. | 5.9 | 3.4 | 3.7 | 4.1 | 3.7 |
| ITC Ltd. | 4.0 | 6.1 | 6.3 | 6.6 | 3.6 |
| Hindustan Unilever Ltd. | - | - | - | - | 3.3 |
Top 10 holdings (in %) on January 31, 2012
(Source: ACE MF, PersonalFN Research)
As indicated by the table above, LTSF’s top-10 equity portfolio constitutes of all ‘A’ group stocks. As on January 31, 2012 the fund held in all 40 stocks in its portfolio, out of which ‘A’ group stocks accounted for 99.9% and the rest 0.1% were the ‘B’ group ones (namely Entertainment Network India Ltd. and Ipca Laboratories Ltd.). The fund holds a portfolio which is diversified across sectors and across stocks within the sector. Top-10 stocks account for 49.7% of the portfolio while Top-5 sector concentration stands at 45.2%. However a noteworthy point is that, despite being benchmarked against S&P CNX Nifty, LTSF has churned its portfolio very often as revealed by its portfolio turnover ratio of 2.19 times.
LTSF follows a multi-cap style as it endeavours to generate superior return by investing in equity and equity related instruments across the market capitalizations. Moreover to build its portfolio, LTSF follows a combination of top-down as well as bottom-up approach for its stock selection. However in order to select a particular stock as well as to determine it potential value, the fund house is guided by one or more of the following considerations:
- Financial strength of the companies (as recognised by financial parameters)
- Reputation of the management and their track record
- Brand building strategy followed by companies for their product and services
- Companies that are relatively less prone to recessions or cycles, either because of the nature of their businesses or superior strategies followed by their management
- Market liquidity of stock
How LTSF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
|---|---|---|---|---|---|---|
| HDFC TaxSaver (G) | 1.2 | -0.7 | 36.9 | 11.7 | 7.05 | 0.31 |
| ING Tax Savings (G) | -3.1 | -5.2 | 34.6 | 2.6 | 7.83 | 0.27 |
| Sahara Tax Gain (G) | 0.7 | 2.5 | 33.7 | 14.3 | 7.78 | 0.27 |
| Religare Tax Plan (G) | -2.2 | 1.4 | 32.9 | 14.1 | 6.55 | 0.29 |
| DSPBR Tax Saver (G) | 1.0 | -3.3 | 30.4 | 11.3 | 7.31 | 0.25 |
| L&T Tax Saver (G) | -2.7 | -8.8 | 29.5 | 2.98 | 8.64 | 0.21 |
| S&P CNX Nifty | 1.9 | -4.4 | 25.8 | 7.5 | 7.67 | 0.20 |
(NAV data is as on March 7, 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 over a 3-Yr time frame the fund has clocked a 29.5% CAGR, which is higher than the CAGR returns of 25.8% generated by S&P CNX Nifty. But LTSF’s performance has not been very luring when compared to top performers in the category. When assessed on the volatility front, LTSF as compared to its category peers, has exposed its investor to higher risk (as revealed by its Standard Deviation of 8.64%), and at the same time has generated ordinary risk-adjusted returns (as revealed by its Sharpe Ratio of 0.21) for its investors.
Fund Manager Profile
| Name of the Fund Manager | Mr Anant Deep Katare |
| Total Work Experience | Over 14 years |
| Managing the fund since | Oct-07 |
| Qualifications | B.E. (Electrical), PGDBA, CFA |
(Source: SID, PersonalFN Research)
In a nutshell...
As seen above the performance of L&T Tax Saver fund is nothing to vie to for – it is ordinary. The return of 29.5% CAGR over a 3-Yr time period may look attractive on standalone basis but its comparison with the category peers shows that L & T Tax Saver is a laggard. Hence we recommend investors to avoid L & T Tax saver.
Although investment in ELSS helps you avail the tax benefits; it is not risk free. It 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.
