Rama Krishna Vadlamudi

June 17, 2010

It is always better to do some tax planning, especially by the salaried class and individual taxpayers, during the beginning of a financial year rather than at the fag end of it. You have now more than nine months time left and you can stretch your investments over this period. There are a range of options available for investors within the Rs one lakh tax deduction available under Section 80C of the Income Tax Act in India. To know your tax slabs, just click for my document:

To know new income tax slabs for FY 2010-11, JUST CLICK: http://www.scribd.com/doc/27601595
The following article will give you an idea about the performance of ELSS funds or Equity Linked Savings Schemes of Mutual Funds, enabling you to invest your hard earned money in some good and well-diversified funds with a long-term track record. Before we know about the best funds, it would be instructive to find out what are the funds that are at the bottom of the ELSS category:

Table 1. BOTTOM FIVE FUNDS ON 3-YEAR RETURNS BASIS
Sl.No. NAME OF THE FUND AAUM for May.10 Rs crore 1 2 3 4 5
Fortis Tax Advantage Plan

1-year % 24.40 25.03 33.94 23.24 9.31 28.04

CAGR* 3-year % (1.36) (1.24) (0.90) 0.52 1.51 8.28

5-year % 16.22 13.44 14.81 9.92 18.44

62 274 44 6 41 NA

Principal Tax Savings ING Tax Savings Escorts Tax Plan LICMF Tax Plan CATEGORY AVERAGE

Data Source: ValueResearchOnlline *Compounded Annual Growth Rate as on June 16,, 2010; AAUM-Average Assets Under Management

Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 17, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com
As can be seen from the above table 1, while the category (ELSS) average return for three years is 8.28 per cent, the fund at the bottom delivered a negative return of 1.36 per cent – with a gap of about 10 per cent CAGR in returns, which will be huge in absolute terms. Even if we compare the five-year performance, the category average is 18.44 per cent, the worst performing scheme could deliver only 9.92 per cent CAGR – with a huge gap of more than 8 per cent CAGR. However, when you compare the returns of the best ELSS fund with the worst fund, the difference will be huge. On a three-year basis as on June 16, 2010, the topmost fund has delivered a return of 19.11 per cent (Table 3 below) and the worst fund (as given in table 1 above) gave a negative return of 1.36 per cent – with the gap between the worst and best being around 21 per cent. While selecting our funds, it’s better to know the funds at the bottom so that we could choose the best funds for our mutual fund portfolio, while avoiding the funds at the bottom. Now, let us come to the performance of Best ELLS schemes.

LIST OF BEST ELSS SCHEMES Table 2. THE FABULOUS FIVE!
Sl.No. 1 2 3 4 5 NAME OF THE FUND
Canara Robeco EquityTaxSaver

LARGE/MID CAP Bias Large 58%, Mid 42% Large 68%, Mid 32% Large 77%, Mid 23% Large 55%, Mid 45% Large 50%, Mid 50%

RISK GRADE Average Low Low
Below Average Average

Fidelity Tax Advantage Franklin India Taxshield HDFC Taxsaver DSP BlackRock Tax Saver

NAV as on 16.06.2010 Rs 19.88 20.03 187.60 213.21 16.25

Notes: All are growth plans and NAV is for growth plans; and all are open-ended schemes

Table 3. More on the Fabulous Five!
Sl.No. NAME OF THE FUND AAUM for May.10 Rs crore 1 2 3 4 5
Canara Robeco EquityTaxSaver

CAGR 1year % 38.23 39.49 29.50 45.11 37.63 28.06

3-year % 19.11 13.68 11.97 11.82 13.77 8.28

5-year % 28.91 -21.08 22.23 -18.44

170 1,156 764 2,427 815 NA

Fidelity Tax Advantage Franklin India Taxshield HDFC Taxsaver DSP BlackRock Tax Saver CATEGORY AVERAGE

Notes: AAUM-Average assets under management; CAGR-compounded average growth rate; and returns as on 16.6.10

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Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 17, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com
Other good funds include, Religare Tax Plan, Sundaram BNP ParibasTaxsaver, SBI Magnum Taxgain 1993 and ICICI Prudential Tax PLan. Though past performance may not be a guide to the future performance, it is expected that the funds given in Table 2 and 3 are going to do well in future also. In the following pages, we shall discuss more on the performance and portfolio of these schemes in specific and selection of mutual funds in general:

1. Canara Robeco Equity Tax Saver: This fund was launched in March
1993 and it is managed by an experienced fund manager, Anand Shah since November 2008. The fund is tilted towards large cap stocks with a share of 58 per cent and the remaining invested in mid and small cap stocks. The fund is having a risk grade of average. Its top picks include Reliance Industries, GAIL, HDFC Bank, Sun TV Network and NTPC. Sectorwise, it is having an exposure of 24 per cent each to Financials and Energy; Services 14 per cent followed by Healthcare and Technology.

2. FIDELITY TAX ADVANTAGE:
This fund was launched in January 2006 and it is managed by a veteran fund manager, Sandeep Kothari since its launch. The fund is tilted towards large cap stocks with a share of more than two-thirds in them. It is a conservative fund and the fund manager is known for his consistency and long-term view. He usually does not believe in keeping the assets in cash. It is a low-risk fund.

3. FRANKLIN INDIA TAXSHIELD:
This fund was launched in the second quarter of 1999 and it is managed by an experienced fund manager, Anand Radhakrishnan since April 2007. The fund is tilted towards large cap stocks with a share of 77 per cent in them. It is a conservative fund and the fund manager is known for his consistency and longterm view. Because of its higher exposure to large cap stocks, the risk is low.

4. HDFC TAXSAVER:
This fund was launched in March 1996 and it is managed by a skilled fund manager, Vinay Kulkarni since November 2006. Compared to Fidelity Tax Advantage and Franklin India Taxshield, this fund’s exposure to mid cap and small cap stocks is much higher at about 45 per cent. The cash holding in the scheme is around seven per cent only and usually the fund does not keep much of its assets in cash. The fund’s risk is below average. However, the fund is wellknown for protecting investor’s money during bear markets or severe downturns as was proved during 2008.

5. DSP BLACKROCK TAX TAXSAVER:
This fund was launched at the end of 2006 and it is managed by a veteran fund manager, Anup Maheswari since its launch. Like HDFC Taxsaver, this fund’s exposure to mid cap stocks is much higher at 50 per cent. The cash holding in the scheme is practically zero. The fund is having average risk grade.
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Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 17, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com
The following filters have been applied while arriving at the above set of funds: 1) The reputation of the particular fund house is considered before picking up individual schemes of that fund house 2) Experience and long-term track record of the fund manager 3) Consistency of returns during bear phases as well as bull markets 4) Long-term track record of the fund, say, more than three/five years 5) Only growth plans of open-ended, diversified equity mutual fund schemes are considered
(Note: The author has been watching the mutual fund industry for more than 10 years and he may have certain biases in selecting the funds.)

There is not any entry load on any of the above schemes. With effect from August 1, 2009, entry loads are banned by the capital market regulator, SEBI. As of now, these schemes do not charge any exit load (3-year lock-in period).

Some Caveats before investing in ELSS schemes
1. ELSS schemes are subject to a lock-in of three years from the date of investment. It’s better to invest in growth options, rather than dividend options, if you are looking for long-term returns. Many a time, funds offer the bait of big dividends towards the end of the financial year to attract more retail investors into these schemes. Dividends are paid out of the NAV and as such investors do not derive any benefit out of them. After dividends, the NAV comes down to the extent of dividend paid. 2. ELSS schemes are eligible for tax deduction of up to a maximum of Rs one lakh under Section 80C of Income Tax Act. 3. If you’re in higher tax brackets of 20% or 30%, investment in these schemes is more beneficial. However, if you’re in 10% tax slab, it’s better to avoid them as they carry the risk of three-year lock-in. Instead, you can go for good and diversified equity mutual funds. For knowing about good and well-diversified equity mutual funds, JUST CLICK:

Good and well-diversified equity MFs in India
http://www.scribd.com/doc/22665551

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Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 17, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com HOW TO CHOOSE EQUITY MUTUAL FUNDS
Before investing in an equity mutual fund, it would be better if investors take a hard look at the following five parameters: 1) Sustainable Performance: Consider the performance of the fund during several time periods – in a bear market as well as a bull market. Don’t consider only the recent performance. Take into account the returns over three/five year time periods. 2) Suitability: The investment objective of the fund must match with the objective of the individual investor. Mid-cap funds may not be suitable for some risk-averse investors. Likewise, investors with higher risk appetite may like to invest in mid-cap oriented funds. 3) Fund Manager’s Track Record: Watch the track record of the fund manager across various funds and different fund houses (if any) 4) Diversification: Check for the number of stocks and concentration of the portfolio. Too large a number of stocks or too less may not provide optimal returns for the investors in the long run. 5) Risk parameters: Look for Sharpe Ratio – which is statistical tool measuring risk-reward ratio. This ratio measures the amount of excess mean return for each unit of risk taken by the fund. For a detailed article on picking up good equity mutual funds, just click:UTUAL

FUN http://www.scribd.com/doc/20712330 Some Caveats before investing in equity mutual funds
1) Read the Scheme Information Document (SID) and Statement of Additional Information (SAI) thoroughly before investing 2) MF performance is subject to market risk. During 2008, some good funds had lost only 40 to 45 per cent against the loss of around 50 to 52 per cent by the market. However, there are some funds which managed to lose more than 85 per cent of their NAV in just one year! 3) Time you keep your money in the market is more important than TIMING the market 4) The longer the time horizon of your investments, the lesser the risk 5) Regular investments through a Systematic Investment Plan (SIP) in the market during the bull as well as the bear phases will give better returns for long-term investors. It’s better to avoid lump sum investments to the extent possible.

Page 5 of 6

Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 17, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com
6) Investors should invest a part of their savings or surplus as per their asset allocation. Asset allocation is a process whereby every investor shall allocate (depending on their own risk appetitie, risk profile, age, time horizon, investment objective, etc) funds to different asset classes, like, fixed deposits, PPF/NSC, equities, mutual funds, real estate, gold and others; in addition to life insurance and medical insurance 7) Before jumping into equities or equity mutual funds, consult your certified financial advisor and get his/her advice based on your investment objectives and needs +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Data source: ValueResearchOnline AUTHOR’S DISCLAIMER: This should not be construed as a recommendation by the author. The author holds a small stake in a few mutual fund schemes and as such it’s safe to assume that the author has a vested interest in general market going up. The views of the author are personal. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.

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