Why do you think tax saving fund is ‘a must have’ in everyone’s investment portfolio?
As we all know, equity linked savings scheme – ELSS funds are eligible for income tax benefit under section 80C of IT Act. An ELSS fund is ideal for individuals who are investing in equities for the first time with the twin objective of tax savings as well as capital appreciation.
Majority of investors in this category are from low to medium income group who aspire to save on tax and seek growth also. For young salaried individuals, investing in ELSS can be a smart strategy as they already have EPF contributions offering fixed returns and ELSS funds can help them save tax and also participate in India’s growth story. For a lot of investors, ELSS gives them the first flavour of equity and investors would prefer consistent performance rather than a volatile journey. The 3-year lock-in helps in taking medium to long term view on stocks of emerging quality companies and enables us to invest in these companies quite early. ELSS is also the best tax saving option under Section 80(C) in terms of its lock-in period and the returns generated historically over the longer term.
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?
As mentioned earlier, ELSS has shown to generate good returns for investors over the long term compared to other tax saving options. Even amongst different categories of mutual funds, this category enjoys the flexibility to invest across market caps and sectors. It is also a good option for anxious investors as the 3-year lock-in ensures that they don’t make pre-mature redemptions.
How should advisors position Aditya Birla Sun Life Tax Relief 96 fund to their clients?
ABSL Tax Relief '96 fund is a well-diversified, multi-cap fund in the ELSS category with a lock-in of 3 years. Our investment style is to focus on the medium-to-long term rather than take short term calls. The investment philosophy of the fund is to invest in quality companies. Quality orientation involves selecting companies run by professional managements which have strong promoters, adhere to corporate governance, manageable leverage, spend sizeable amount of revenue on R&D, and have predictability of earnings and strong business moats. Integration of ESG (Environmental, Social & Governance) factors into investment analysis and portfolio construction is practiced on a regular basis. While investing we try to avoid buying companies that have excessive business uncertainty.
Take us through the investment and product strategy of Aditya Birla Sun Life Tax Relief 96 fund. How is it different from other schemes in the market?
Our approach is medium-to-long term and our endeavour is to identify beneficiaries of a fast-changing world. In the process, we try to enter businesses early before growth accelerates. We focus on quality stocks and avoid businesses with excessive uncertainty. We differ from most other ELSS products in terms of stock selection. We largely follow a bottom-up stock selection and so our stock and sector weights can differ from the benchmark. Our endeavour is to generate superior risk adjusted returns.
Tax saving funds often see a sharp rise in inflows between January and March, while for the rest of the fiscal the inflows are relatively subdued. How can advisors encourage investors to invest in ELSS throughout the year?
Ideally, an investor should do his tax planning at the start of the financial year rather than at the last minute in March. Thus, a Systematic Investment Plan (SIP) would be the ideal method to invest in the fund since it would enable investors to take advantage of volatility and enhance returns while avoiding the perils of mistiming the markets. Investors also have an option of weekly SIP which helps inculcate a habit of saving. An empirical analysis of 3-year rolling returns of our fund since 2011 showed the average return for an investment done in Jan, Feb or Mar is lower compared to other quarters of the year.
What is your view on the valuations in each segment of the market –large, mid, small cap stocks?
Despite the largecap indices being at record highs, the midcap and smallcap indices are 40%-60%below their peaks. Largecaps have outperformed over the past 1-2 years but there is value emerging in mid and smallcap stocks. Having said that, one has to focus on stock selection rather than market cap as quality companies have gone from being smallcap to midcap to largecap while poorly run largecaps have become smallcap or even disappeared from the market. Time and time again, it has been proven that focus on quality stocks pays off in the long run, even though one has to endure short-term volatility and use the mispricing of stocks in volatile periods to one's advantage.
What is your five-year outlook on equity markets? What kind of returns should an investor expect from ELSS in the next five years?
We are constructive on equities in the longer term especially on quality stocks with structural growth stories in an environment of falling interest rates domestically and negative interest rates in many geographies. India has a large domestic market of 1.35 billion people representing 17% of the world population, with a rising per-capita income and rising aspirations. We truly believe that India is headed towards becoming a $5 trillion economy by 2025 and this growth has to result in earnings growth for companies and hence higher returns for investors. Some factors that will drive this growth are GST implementation, corporate tax cuts, increased FDI in manufacturing, global manufacturing shifting to India, improving depth and breadth of financial markets, increasingly younger population with changing spending pattern and higher disposable incomes due to dual income families.
New age ULIPs have become very competitive to ELSS. In fact, investors can get better tax benefits in ULIPs. In such a scenario, why do you think ELSS still makes sense to investors?
An investor should ideally keep insurance separate from investments. Also, with an ELSS, there is no yearly premium commitment and the investor can invest and redeem as per their liquidity needs subject to a 3-year lock-in (lowest amongst tax saving instruments).
