Dual-purpose funds

ELSS are a good way to save tax. They also offer high returns.

A cursory look at the returns of equity funds across categories throws up some interesting numbers.

The first thing that strikes you is that the best performing scheme among all equity funds as far as one-year returns are concerned is a tax saving fund (ELSS) "� SBI Magnum Tax Gain. 
 

How Tax-saving funds fared Returns in % as on June 12, 2005
Scheme	1 year	3 years	5 years
SBI Magnum Tax Gain Scheme 93	154.96	67.52	16.79
Taurus Libra Taxshield	141.49	44.56	22.22
Prudential ICICI Taxplan - Growth	115.08	60.21	31.47
HDFC Taxsaver Fund - Growth	114.71	62.7	33.17
Sundaram Taxsaver - Growth	92.8	48.94	22.17
HDFC Long Term  Advantage Fund - Growth	75.72	59.06	-
Tata Tax Saving Fund	72.72	49.29	21.25
ING Vysya Tax Saving Fund - Growth	71.35	-	-
Birla Equity Plan	66.26	57.38	18.28
Franklin India Taxshield - Growth	61.11	45.47	20.54
Source: www.mutualfundsindia.com

Secondly, of the top five performers, three are tax-saving funds. And of the top six, four are ELSS schemes. This raises a question "� what is it about tax-saving funds that makes them such outperformers?

First things first. Tax-saving funds have certain advantages "� from investment and operational angles. Under the new tax regime (under Section 80C), investments in tax-saving funds are eligible for deductions subject to an upper limit of Rs 100,000 (as opposed to just Rs 10,000 earlier).

So investors who can take a higher risk are better off with tax-saving funds than assured-return instruments like the public provident fund (PPF) and national saving certificate (NSC). "With the hike in limit, we expect a surge in investor interest in these schemes," says Suhas Naik, director, equity markets at ING Vysya Mutual Fund.

Also the structure of these schemes makes fund managers' job a bit easier apart from protecting investor interests.

"Tax-saving schemes requires a lock-in period of three years. This allows the fund manager to invest in stocks and sectors, which, he thinks, are the best bets without having to worry about redemption pressures," notes Naik. This results in an element of discipline in the investment process, while it also prompts the investor to stay invested.

The figures suggest that investor interest in tax-saving funds has been on the rise in the recent past. Post-Budget, assets under management under the tax-planning category have grown 32.55 per cent to Rs 892.93 crore as of June 30, 2005, from February 28, 2005.

As far as performance over the past one year goes, tax-planning funds stand second (73.07 per cent) behind FMCG sectoral funds (75.15 per cent). Diversified funds managed 60.44 per cent during the same period.

So in terms of saving taxes and enjoying better returns tax-saving funds present a good opportunity. Here are some of the top performers in the category:

SBI Magnum Tax-gain
Latest NAV: Rs 69.97
Corpus: Rs 160.18 crore

SBI Magnum Tax-gain is the best performing equity fund across categories with returns of 154.96 per cent in the past one year.

It is also the biggest tax-saving scheme with AUM of Rs 160.18 crore, as of June 30, 2005. The fund has also topped the tax-saving fund return table for two-year and three-year periods.

As of June, it has the maximum exposure to Zee Telefilms, followed by Praj Industries and Infosys Technologies. The rest of the top 10 positions are mostly mid-caps like KEC International.

During the start of the year the fund's exposure were mainly concentrated on stocks in the engineering and infrastructure space like Havell's India, Crompton Greaves, KEC International and IVRCL Infrastructure. The rise in these stocks during the year has stood the fund in good stead.

Prudential ICICI Tax Plan
Latest NAV: Rs 56.20
Corpus: Rs 86.14 crore

The fund has been the most impressive performer in the ELSS category, giving consistent returns across time-periods. The one-year return stands at 115.08 per cent, while for the three-year period, the fund has given 60.21 per cent.

It is also the second-best performer over a five-year period with returns amounting to 31.47 per cent.

The fund has some unusual stocks in its portfolio, with oil drilling company Aban Loyd Chiles Offshore as the top pick. State Bank of India is one of the rare blue-chips that find a mention in the portfolio, which is dominated by mid-caps.

HDFC Tax Saver
Latest NAV Rs 83.92
Corpus Rs 67.03 crore

The fund ranks as the best performer over the five-year period with returns of 33.17 per cent. Over shorter durations also it has done well, coming within the top five. The fund's return since its inception in March 1996 stands at an impressive 44.02 per cent.

While the cream of its portfolio is dominated by blue-chips such as Infosys, Bhel and SBI, the fund has taken calculated exposure to stocks like Balkrishna Industries, Hindustan Oil Exploration Company and Carborundum Universal.

The recent affinity of large-caps is a late phenomenon though, as evidenced by the fact that at the start of the year its top holding was Shanthi Gears. Over the past one year the fund has moved out of big stocks such as Hero Honda, ITC and HPCL.

Sundaram Taxsaver
Latest NAV Rs 15.07
Corpus Rs 15.02 crore

Though relatively smaller in size, Sundaram Taxsaver has proved its mettle in the past few years. For the five-year period, the fund ranks at number four among 15 schemes, with returns of 22.17 per cent. It is ranked fifth as far as one-year returns are concerned, with 92.80 per cent.

The interesting thing about this fund is that there is no exposure to any one stock above 5 per cent. The top holding is MM Forgings at 3.93 per cent, followed by GTN textiles at 3.64 per cent.

In a portfolio dominated by stocks from the mid-cap segment, the large-cap exceptions are Wipro, Tata Motors and Gujarat Ambuja Cements. The fund exited from McDowell, Sesa Goa and SAIL among others last month.

Franklin India Taxshield
Latest NAV Rs 78.33
Corpus Rs 139.21 crore

Franklin Taxshield is an average performer with one-year returns amounting to 61.11 per cent. But it is also one of the largest funds in the tax saving category. It has given a return of 38.93 per cent since inception in April, 1999.

Those who prefer the relative safety of large-caps may like the fund. Infosys holds the top spot in the fund's portfolio at 8.19 per cent, followed by Hindalco at 4.88 per cent.

There is any number of large-cap stocks in the portfolio, including Nestle, Larsen & Toubro, TCS, Grasim and ICICI Bank. The top part of portfolio composition has changed little since the beginning of the year, though ITC is a prominent exclusion in the June portfolio.