As the financial year draws to a close, investors who still have tax saving investments to make under section 80C, should evaluate Equity Linked Savings Scheme. Equity Linked Savings Scheme (ELSS) is one of the most popular tax saving investments under section 80C of the Income Tax Act, where investors can avail the triple benefits of tax savings, capital appreciation and tax free returns. We have discussed why ELSS is the best long term tax saving investment option in our article, The best tax saving investment: Should you invest in PPF or ELSS. In the 2014 budget the overall limit under section 80C has been increased to Rs 1.5 lacs. This gives investors an opportunity of saving more tax and allocating more investment to ELSS, which in turn will help them with higher capital appreciation over the long term.
Reliance Tax Saver fund has been one of the best ELSS performers in the last three years. In fact this ELSS fund gave the highest trailing returns among all ELSS funds over the last one and two year periods. This fund launched in Aug 2005, has generated nearly 19% annualized returns since its inception. See the chart below, for the comparison of trailing annualized returns over one, two, and three year periods, between Reliance Tax Saver fund (Growth Option), the ELSS Category and the benchmark S&P BSE 200 index (NAVs as on February 18 2015).
The fund outperformed its peers on a fairly consistent basis ever since its inception. The chart below shows the annual returns of the Reliance Tax Saver (Growth option) and the ELSS category, since the inception of the fund.
The fund has been ranked a “Very Good” performer (Rank 1) by CRISIL for several successive quarters. Morningstar has assigned a 5 star rating for this fund.
This fund 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 an equity fund, it is subject to market risk and volatility as compared to other tax saving instruments like PPF, NSC etc. However, equities as an asset class generate superior returns over the long term and serves as an effective hedge against inflation. What distinguishes Reliance Tax Saver funds from most of its peers is the midcap orientation of its fund portfolio. As such, midcap stocks have the potential to provide higher returns than large cap stocks. However, the volatility of midcap stocks is higher than large cap stocks. This fund is suitable for investors planning for long term financial objectives like retirement planning, children’s education, marriage etc. The fund has an AUM base of over
र 4,100 crores, with an expense ratio of 2.34%. The fund manager of this scheme is Ashwani Kumar.
The fund manager employs a bottoms stock picking approach to his portfolio and identifies companies at attractive valuations with high growth potential. About 70% of the portfolio holding is invested in small and midcap stocks. From a sector perspective, the portfolio has a bias for cyclical sectors like Automobiles and Auto Ancillaries, Engineering, BFSI, Metals and Cements. As the investment cycle revives in our economy these sectors have the potential to deliver strong earnings and consequently excellent returns. In terms of company concentration, the portfolio is very well diversified with its top 5 holdings of TVS Motor, SBI, Tata Steel, BHEL and Wipro accounting for only 30% of the total portfolio value. Even the top 10 stocks account for less than 45% of the portfolio holdings.
Performance comparison with Peer Set
A comparison of annualized returns of Reliance Tax Saver Fund versus its peer set over various time periods shows why this fund is considered a chart topper among ELSS funds. In terms of trailing annualized returns, the fund has beaten all its peers across most time periods. See chart below for comparison of annualized returns over one, two and three year periods based on NAVs as on February 18 2015.
Risk & Return
In terms of risk measures, the volatility of the Reliance Tax Saver fund is understandably on the higher side, given its small and midcap orientation. The annualized standard deviation of monthly returns of Reliance Tax Saver Fund over the last three years is 21.6% compared to 15% for the ELSS category. However, on a risk adjusted return basis, as measured by Sharpe Ratio the fund has outperformed the ELSS category. See charts below for comparison of volatilities and Sharpe ratios between Reliance Tax Saver Fund and ELSS funds category.
र 1 lac lump sum investment in the Reliance Tax Saver fund NFO (growth option) would have grown to value of nearly र 5 lacs as on February 18 2015. The chart below shows the growth of र 1 lac investment in the Reliance Tax Saver fund (growth option) since inception.
The chart below shows the returns since inception of
र 3000 invested monthly through Systematic Investment Plan mode in the Reliance Tax Saver fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund since inception. NAVs as on February 18 2015.
The chart above shows that a monthly SIP of
र 3000 started at inception of the Reliance Tax Saver fund (growth option) would have grown to over र 9.9 lacs by February 18 2015, while the investor would have invested in total about र 3.4 lacs. The SIP return (as measured by XIRR) since inception of the fund is nearly 22%.
Reliance Tax Saver fund has established itself as one the best ELSS funds in the last few years. It has delivered strong outperformance and has created wealth for its investors. The long term performance of Reliance Tax Saver fund is a testimony of the power of ELSS as a wealth creation investment. 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 should also ensure that the investment objectives of the fund are aligned with their individual risk profiles and time horizons. They should consult with their financial advisors if Reliance Tax Saver fund is suitable for their investment portfolio.