TAX-SAVING FUNDS FOR YOUR PORTFOLIO

If you have not completed your investments for tax-benefit purposes already, you might want to consider adding one or two equity tax saving funds to your portfolio and qualify for deductions under Sec 80 C. A shorter lock-in (three years) than conventional small-savings schemes and promise of equity-returns, in addition to the tax benefit make ELSS funds appealing options for those with a higher risk appetite.Such investors can consider a small allocation to tax-saving funds within the overall Rs 1,00,000 limit. But such investments can be made after exhausting conventional options such as PPF, bank fixed deposits and other small-savings instruments.

Suitability: Most tax-saving funds have the Sensex, Nifty or the BSE-100 as their benchmark. But they tend to invest across market capitalisation ranges, with a substantial exposure to mid-cap stocks. Barring one or two funds, most of them invest at least 40 per cent of their assets in stocks with a market capitalisation of less than Rs 8,000 crore. Most of these funds sport a small asset base, which enables them to take advantage of opportunities in the mid-cap space. However, this also makes them more risky than a typical diversified fund.Funds such as Magnum Tax Gain, Fidelity Tax Advantage, HDFC Tax Saver and Reliance Tax Saver have grown significantly in size in recent years, with their asset bases each greater than Rs 1,000 crore. Such funds now invest in a more even blend of large-cap and mid-cap stocks, as their size limits them from taking too heavy an exposure to mid-cap stocks.Considering their higher risk profile and the lock-in period, it might be better to take the SIP route to investing in these funds.

Performance overview: A good number of tax-saving funds have outperformed the Sensex and the Nifty over the past year, but not by a huge margin. Despite a significant exposure to mid-caps however, their performance vis-À-vis the broader indices is not as impressive. Only four in 10 funds in the category outperformed the BSE-200 in this period.In terms of performance, tax-saving funds, as a category, have largely kept pace with diversified funds over one-, three-year and five-year periods. However, there is a significant divergence in performance within the category.In fact, while almost 20 funds have a prior performance record of five years and more, only a handful has managed to consistently beat the market during this period.Magnum Taxgain, Sundaram Tax Saver, Birla Sun Life Tax Relief ’96, Principal Personal Tax Saver and Principal Tax Saving fund outperformed the BSE-200 in at least four out of five years. These funds maintained their lead over the market over the past year as well.

Preferred picks: Magnum Taxgain, Sundaram Tax Saver and Birla Sun Life Tax Relief ’96 are among our preferred picks. Magnum Taxgain has gained a more large-cap focus in recent years, owing to a swelling asset base.It figures somewhere in the middle of the fund rankings over a one-year period. Nevertheless, it remains among our preferred funds owing to its superior long-term track record.There are other funds that have a good five-year track record but have slipped in the last two years, such as ICICI Prudential Tax Plan, HDFC Tax Saver and HDFC Long Term Advantage. Investors may wait for a pick-up in performance in these funds before contemplating fresh exposures – www.hindubusinessline.com