Franklin India Taxshield Fund: One of the biggest wealth creators among ELSS funds

With Equity Linked Savings Schemes investors can not only save taxes, but by investing in the over the long term can create substantial wealth (please read our article, ELSS is ideal for Tax Savings and Wealth Creation). Franklin India Taxshield is one of the greatest wealth creators among ELSS funds. र 1 lac invested in the Franklin India Taxshield Fund (growth Option) NFO in 1999 would have grown to over र 43 lacs by April 2, 2015. This fund launched in April 1999, has beaten the returns of ELSS category and generated significant alphas. See the chart below, for the comparison of annualized returns over one, three, five and ten year periods, between Franklin India Taxshield fund (Growth) and the ELSS funds category average (NAVs as on April 8).

The fund has been ranked a Good performer (Rank 2) by CRISIL and Morningstar has assigned a 5 star rating for this fund.

Fund Overview

This fund from the Franklin Templeton stable is suitable for investors looking for tax planning investment options under Section 80C with the expectation of long term capital appreciation. However, since this is essentially a diversified equity fund, it is subject to market risk and volatility as compared to other fixed income tax saving instruments like PPF, NSC etc. However, equities as an asset class generate superior returns over the long term and as such the fund is suitable for investors planning for long term financial objectives like retirement planning, children’s education, etc. The fund has an AUM base of over Rs 1,670 crores, with an expense ratio of 2.42%. The fund manager of this scheme is Anand Radhakrishnan and Anil Prabhudas.

Portfolio Construction

While the fund portfolio has a large cap bias, the fund managers are focused on investing in good growth stocks. Large cap stocks form around 58% of the fund’s portfolio, while midcap and small cap stocks comprise the rest. The fund managers employ a bottom-up approach to identify stocks with good appreciation potential and attractive valuations. From a sector perspective, the portfolio has a bias for cyclical sectors like BFSI, Engineering, Automobiles and Auto Ancillaries, but it also has substantial allocations to defensive sectors like IT and Pharmaceuticals. This portfolio construction enables the fund manager to get good returns across different market conditions. In terms of company concentration, the portfolio is very well diversified with its top 5 holdings, HDFC Bank, Infosys, ICICI Bank, Indusind Bank and Yes Bank accounting for only 26% of the total portfolio value. The top 10 stocks account for only 40% of the portfolio holdings.

Performance comparison with Peer Set

A comparison of annualized returns of Franklin India Taxshield Fund versus its peer set over various time periods shows why this fund is considered one of the top performers among ELSS funds. In terms of trailing annualized returns, the fund has beaten most of its peers across most time periods. See chart below for comparison of annualized returns over one, two and three year periods. NAVs as on April 8 2014.

Risk & Return

Even though the Franklin India Taxshield Fund has outperformed the ELSS category in terms of returns, from a risk perspective, the volatility of the fund is lower than that of the ELSS category. The annualized standard deviation of monthly returns of Franklin India Taxshield Fund over the last three years is 13.5% compared to 15% for the ELSS category. The Sharpe Ratio of Franklin India Taxshield fund is higher than that of the ELSS category, implying superior risk adjusted return from this fund relative to other ELSS funds. See charts below for comparison of volatilities and Sharpe ratios between Franklin India Taxshield Fund and ELSS funds category.

Franklin India Taxshield Fund (Dividend Option) has an excellent dividend payout track record. The fund has paid dividend on a fairly regular basis over the last 10 to 15 years. The table shows the dividend history of the Franklin India Taxshield Fund (Dividend Option) over the last 15 years.

र 1 lac lump sum investment in the Franklin India Taxshield Fund (growth option) ten years back would have grown to value of nearly र 6.5 lacs as on April 8 2015. The chart below shows the growth of र 1 lac investment in the Franklin India Taxshield Fund (growth option). This implies a compounded annual return of 21%.

The chart below shows the returns of र 3000 monthly SIP in the Franklin India Taxshield Fund (growth option) over the last 10 years. The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on April 8 2015.

The chart above shows that a monthly SIP of र 3000 in Franklin India Taxshield Fund (growth option) started 10 years back, would have grown to over र 9.8 lacs by April 1 2015, while the investor would have invested only र 3.6 lacs. The SIP return (as measured by XIRR) of the fund over the last years is 19%.

Conclusion

Thus we can see that Franklin India Taxshield Fund has not only helped investors save taxes but has also created substantial wealth for them. Investors planning for tax saving investments can consider buying the scheme through the systematic investment plan (SIP) or lump sum route with a long time horizon. Investors looking for tax free dividends can invest in the dividend option of the scheme. Investors should consult with their financial advisors to ensure that the investment objectives of the Franklin India Taxshield Fund are aligned with their risk profile and financial goals.