Most advisors consider ELSS just for tax savings and recommend allocation of up to Rs.1.50 lakh. Why do you think advisors should look at ELSS beyond tax savings?
Equity investments should always be with a long term horizon. The lock-in period in ELSS helps in aligning the investor’s time horizon to the longer term, enabling him to enjoy better holding period & also the returns. Thus, while tax benefits are available only for investments up to Rs.1.50 lakhs, the fund is suited for larger ticket size investments also, from a wealth creation perspective. Thus, when an investor’s time horizon is long term, he might as well invest in an ELSS fund where the fund manager has an added flexibility to construct portfolio with a long term mindset, without worrying about the prospect of unanticipated or increased redemptions.
Most people invest in PPF and NPS for retirement savings. However, there is no such notion attached to ELSS. In your view, how advisors can position ELSS for long-term goals like retirement and children education?
It is now well accepted that equity mutual funds are one of the best ways to beat inflation and create long term wealth. ELSS funds come with the added advantage of tax benefits. ELSS schemes, over longer term have given better returns than most other tax saving avenues with the lowest lock-in period among tax saving products. Thus, advisors can highlight the twin benefits of higher potential returns with tax benefits and tag the ELSS investments towards achieving a long term goal like savings for children’s education, marriage, buying a house etc. Many investors in ELSS come with the idea of recycling i.e. redeeming the ELSS investment made three years ago to pay for current year’s ELSS investment. Advisors can highlight the benefit of continuing with the investments as a way of meeting long term goals.
Why do you think ELSS is ‘a must have’ in every investment portfolio?
Coupled with advantages of investing in mutual funds, ELSS funds offer tax advantage on investments u/s 80C of the Income Tax Act of 1961. One major advantage of ELSS funds is that because of the lock-in period of 3 years, the fund managers have a greater maneuverability to manage investments over the long term with the objective of wealth creation for the benefit of investors. Hence, for investors seeking long term wealth creation, an allocation to ELSS funds is a must irrespective of the tax saving requirements of the investor.
Post Budget 2018, many investors believe that ULIPs are better because of the tax advantage. What is your view?
Mixing insurance and investments is the basic error many make. Ideally, for investing, mutual funds are by far the best platform with the lowest fees & cost structure. ELSS mutual funds are the best funds to invest for long term. We strongly believe mutual fund products are highly regulated products, with lot of transparency given by the structure itself. The cost to the investor is only the AMC fees which are very negligible in comparison to the long term returns, the category of funds provide. In the case of ULIPs the cost structure and fund management fees are not uniform with all insurance companies, so choosing the right fund becomes very tough from an investor perspective. The lock in period is higher for ULIPs. ULIPs also have less flexibility as the annual investment amount is committed for a longer period.
Many investors look at ELSS between January and March to save on taxes. Why it makes sense to invest systematically in ELSS throughout the year?
Be it ELSS or investment in any other equity fund, for retail investors; it is always advisable to invest systematically. Already, many investors are using SIP mode of investing even in ELSS Funds instead of waiting for January to March Quarter. Market conditions in one particular quarter may be volatile and it is always advisable to take benefit of value cost averaging while investing. SIPs also help investor invest in a disciplined manner and help avoid the last minute rush to make investments. Even for lump sum investment in ELSS Funds, markets present attractive investment opportunity through the year and not necessarily in the last quarter of the financial year.
Take us through the investment and product strategy of ITI Long Term Equity Fund. How it would be different from other ELSS schemes in the markets?
ITI Long Term Equity Fund will follow the fund house core investment philosophy ‘SQL’ (S: Margin of Safety, Q: Quality of the business and L: Low Leverage).
Margin of safety is the fair value of the business minus the current share price. We feel buying stocks with good upside and less of downside is critical for a good investment experience.
Quality companies with strong competitive advantages have been long-term wealth creators and therefore focusing on good quality companies is necessary to protect the downside and to create a good compounding experience. The fund house analyses the industry structure, promoters’ credibility, business fundamentals, management track record, growth ambitions and balance sheet strength to evaluate the company’s health.
Lastly, the fund house analyses the company’s leverage situation and prefers low leverage companies for investments. High financial leverage significantly reduces a business’s ability to withstand cyclical downturn. Low leverage companies are generally cash rich and are able to channelise their cashflows to grow the business successfully.
As a discipline, the fund will have at least 90% exposure to equities at any point of time and generally prefers not to take cash calls. Typical portfolio will include 40-70 stocks. The portfolio will be having a bunch of companies that meet the 'SQL' investment philosophy. More than 80% of the fund will always be in core set of companies and up to 20% of the fund is expected to be in tactical stocks. Core set of companies are strong and sustainable businesses with competitive advantages in their respective fields, while the tactical allocation will be towards good companies with significant upside potential but going through temporary problems and at the same time trading at beaten down prices. The fund will also try to take advantage of the three year lock-in-period, by having a longer tail of mid/small cap companies, which can potentially give higher returns over longer term.
The fund house strongly believes that “If a fund manager avoids the losers, the winners will take care of themselves”. If you analyse the Sensex history of last 40 years, it suggests that 75% periods of time markets have been going up or flat, 25% periods of time markets have been going down. Overall Sensex has delivered approx. 15% CAGR in returns over 40 years. If the fund manager would have been able to protect the downside then the 15% CAGR jumps to 31% CAGR. We will be clearly focusing on the stringent risk management measures institutionalised to ensure the smooth investing journey for the investor thereby offering consistent & non-volatile wealth creation experience.
