Description
The document describes on Equity Linked Saving Schemes (ELSS): Performance Evaluation report.
Equity Linked Savings Schemes
Performance Evaluation Report
This report evaluates the performance of 5 top ELSS benchmarked against BSE Sensex. It describes the tax advantages associated with the scheme. It highlights the issues & marketing challenges faced by the mutual fund.
Equity Linked Savings Schemes
TABLE OF CONTENTS
Basics of an ELSS.................................................................................................................... 3 Mode of Operation ................................................................................................................ 3 Regulatory Aspects ................................................................................................................ 4 Taxation Issues ...................................................................................................................... 6 Target Investors .................................................................................................................... 7 Market Leaders ..................................................................................................................... 8 Marketing Issues ................................................................................................................... 8 Trends in Industry .................................................................................................................. 9 Investor Perception ............................................................................................................. 10 Selected Funds..................................................................................................................... 10 Performance Evaluation ...................................................................................................... 12 Investor Scenario ................................................................................................................. 13 Current Status and Future Prospects .................................................................................... 13 Bibliography ........................................................................................................................ 14
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Equity Linked Savings Schemes
BASICS OF AN ELSS ELSS stands for Equity Linked Savings Schemes. ELSS was introduced in 1990 under the now – repealed Section 88CCB of the Income Tax Act, the scheme is now embraced by Section 80 of the same Act. The duration of such a scheme is ten years, and nay gains made under the scheme will be treated as long – term capital gains. The original investment, up to Rs 10,000 will be added to the investor’s income in the year of receipt. These schemes are run by the Unit Trust of India, LIC, and various banks. In addition, equity-linked instruments carry an inherent market-driven risk. ADVANTAGES OF ELSS OVER NSC AND PPF ? ? ? ? ? ? Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years. Since it is an equity linked scheme earning potential is very high. Investor can opt for dividend option and get some gains during the lock-in period Investor can opt for Systematic Investment Plan Some ELSS schemes also offer personal accident death cover insurance Provides 30 to 40% returns compared to 8% in NSC and PPF
DISADVANTAGES OF ELSS ? ? ? Risk factor is high compared to NSC and PPF Premature withdrawal is not allowed but it is allowed in other instruments in some specific conditions. Lock-in Period of 3 years minimum.
DIVERSIFIED EQUITY SCHEMES AND ELSS Both ELSS and diversified equity scheme operates in same way. Both are high return and high risk schemes. But there is a 3 year lock in period of ELSS and it provides tax benefits too. MODE OF OPERATION 3|Page
Equity Linked Savings Schemes
An ELSS is the mirror image of a diversified equity fund1. This means the fund manager will invest in shares of various companies across various industries. What sets it apart is the added tax benefit, something a diversified equity fund does not offer. ELSS funds have a lock-in period of three years. This could be restricting, but look at the other side of the picture -- the lock-in period prevents unnecessary withdrawals and helps one’s money grow over a period of time. A three-year lock-in period is necessary because one needs to take a long-term view when investing in equity. The real potential of equities starts to show only after a few years. This allows one to ignore the short-term slumps and stay invested for the long haul. SYSTEMATIC INVESTMENT PLAN Best way to invest in ELSS is through Systematic Investment Plan(SIP). With SIP you can invest a small amount every month for a specific time period. With SIP investor can take advantage of fluctuations in the stock market. So investor will get more units when the market is down and get less units when the market is up. For eg if you are investing Rs 1000 every month and you will get 100 units for when Net Asset Value (NAV) is 10 and will get 50 units when NAV is 20. So investing a fixed sum regularly helps to cover the market fluctuations by rupee costs averaging. Also most of the Asset Management Companies (AMC) charges less entry load for SIP compared to normal purchase. REGULATORY ASPECTS SCHEMES OF A MUTUAL FUND The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees.
1
A mutual fund that invests in the stocks of various companies of various sectors.
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Equity Linked Savings Schemes
The offer document shall contain disclosures, which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to make by the scheme in the listed securities of the group companies of the sponsor a close-ended scheme shall fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution". The mutual fund and asset management company shall be liable to refund the application money to the applicants,(i) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (1); (ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1). RULES REGARDING ADVERTISEMENT: The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. GENERAL OBLIGATIONS: The financial year for all the schemes shall end as of March 31 of each year. Every mutual fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. RESTRICTIONS ON INVESTMENTS: A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency 5|Page
Equity Linked Savings Schemes
authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. TAXATION ISSUES ? ? Investments in ELSSs fall under Section 80C of Income Tax Act The limit under this section is Rs 100,000. This is irrespective of how much you earn and under which tax bracket you fall. o Also, there are no sub-limits under this overall Rs 100,000 amount. ? One can invest the entire amount in ELSS or infrastructure bonds. How you utilise the limit of Rs 100,000 is entirely up to the individual investor. ? ? The dividends that the investor earns in an ELSS are tax free in his hands. When one sells the units of these funds, one can benefit from long-term capital gain, under which one don't have to pay capital gains tax. SECTION 80C Section 80C has a lot more purpose and meaning from the long-term perspective of taxability of investments than the earlier Section 88 rebate. Section 80C replaces the existing Section 88 with more or less the same investment mix available in Section 88 but with a major change in the method of providing a tax benefit. If you have a taxable income of Rs.6,00,000. You can invest Rs.1 lakh in a tax saving mutual fund and your taxable income comes down to Rs.5,00,000. This is very useful if you're in the highest tax bracket. By investing Rs.1 lakh in ELSS mutual funds you save on the tax to be paid on it, which is Rs.33,360. This is why you see large ads every year in the last quarter of the year inviting you to invest in ELSS and 'save upto Rs.33,360'. Tax saving mutual fund schemes are offered by all assetmanagement companies (AMCs) including Reliance, HDFC, Tata, Franklin Templeton, ICICI Prudential etc Here's how it works.
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Equity Linked Savings Schemes
CBDT CLARIFICATION ON ELSS The text of the CBDT’s clarification is: "The Equity-Linked Savings Scheme, 2005, has been notified vide S.O. No. 1563(E) dated 3 November 2005. The Central Board of Direct Taxes has clarified that investments made on or after 1st April, 2005, in plans, which are in accordance with ELSS 1992 or ELSS 1992 as amended in 1998 are also eligible for tax benefit under Section 80C of the Income Tax Act, 1961." TARGET INVESTORS The Swarna scheme will be investing primarily in physical Gold and therefore the ideal investor class would be who like to invest in gold because of its specific characteristics namely: ? ? ? Growth independent of the economic cycles Long investment cycles Low volatility
This scheme has also been made into an exchange traded scheme, so that the investor has the liquidity provided by equities therefore removing the biggest disadvantage of general mutual funds in which liquidity is always a problem. The investor in his earning phase can invest small amounts at a regular interval since the scheme offers SIP & similarly, sell the units in case of need as it offers SWP as well. A typical investor would be: ? ? ? ? ? ? ? Age above 30 yrs and in earning phase Looking for long term appreciation & not regular income like dividend etc. Has a housing loan Providing for children education Planning for child’s wedding Takes care of old parents Planning for retirement 7|Page
Equity Linked Savings Schemes
MARKET LEADERS The top 15 ELSS schemes are:
Rank Scheme Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Taurus Taxshield - Growth Sundaram BNP Paribas Taxsaver - (Open Ended Fund) - Growth Sahara Taxgain - Growth Fidelity Tax Advantage Fund - Growth Principal Personal Taxsaver SBI Magnum Tax Gain 93 - Growth Franklin India Taxshield - Growth Franklin India Index Tax Fund HDFC Taxsaver - Growth Reliance Tax Saver Fund - Growth Kotak Taxsaver - Growth Baroda Pioneer ELSS 96 HDFC Long Term Advantage - Growth Tata Tax Saving Fund UTI Equity Tax Savings Plan - Growth NAV (Rs.) 27.53 36.7 28.02 15.41 77.16 49.4 152.4 35.76 161.93 15.31 14.45 21.61 99.25 43.87 32 Last Years 25.29 21.22 18.47 17.27 16.11 14.38 13.88 13.34 12.18 12.11 11.84 11.57 10.66 10.65 9.02 3 Since Inception 13.74 17.23 28.66 13.47 25.59 14.89 30.22 16.32 25.33 11.82 10.47 11.86 30.66 20.47 15.1
Table 1 : Top 15 ELSS (Source:www.mutualfundsindia.com)
MARKETING ISSUES MARKETING CODE The marketing code aims at preventing from using deceptive statements and publicity to attract investors. According to the guidelines: ? ? ? ? The content of advertisements should be verifiable from the offer document. Any forecast of NAV or growth or returns would be considered misleading unless backed by adequate reserve funds or guarantees by sponsors/third parties. Any advertisement or sales literature giving returns, growth etc not calculated as per guideline would be considered misleading AMC cannot claim about capabilities not supported by track record of three years. 8|Page
Equity Linked Savings Schemes
? ? Offer document should precede any advertisements or literature. For schemes existing for >1 yr, annualized yield should be presented.
PROBLEMS ? ? ? The marketing agent for the mutual funds has no role in the day to day activities and investment decisions of the funds. Investment in mutual funds is subject to market risks and past performance is no guarantee towards future performance. Investors need to be educated.
SKILL FORMATION AND INVESTOR EDUCATION ? Certification to operate: It is mandatory for agents to have certification to operate. The certification test is designed by AMFI & is a part of NSE certification in the Financial market. Investor education program: The investor education program led by UTI Institute of Capital Market is designed to spread awareness among investors.
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TRENDS IN INDUSTRY Product innovation is now passé with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible. The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generations of private funds, which have gained substantial mass, are now flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry. Rewarding honest and transparent management with higher valuations has created a system of riskreward created where the corporate sector is more transparent then before. Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are improving. What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds.
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Equity Linked Savings Schemes
INVESTOR PERCEPTION The confidence level of the investors in the stock market and mutual funds is almost the same. Nearly two-third of the investors demonstrate moderate confidence level in the stock market investment. On the other hand, nearly seven-tenth of the investors demonstrate moderate confidence level in mutual funds. Nearly one-fifth of the investors demonstrate high level of the confidence in opting both the stock market as well as mutual funds. It implies that investors are ready to park their money which promise high returns. Nearly one-half of the investors prefer to keep their investment in mutual funds from one to three years. Investors do not want long term investment due to delayed realization of returns. Likewise, investors did not invest in one year mutual funds because of greater risk involved in them. Hence investors are interested to keep investment for an average period in mutual funds. Analysis of micro factors influencing mutual funds reveals that one –third(highest) of the investors prefer to invest on the recommendations of their friends and relatives while onefourth of the investors depends upon the recommendation of their financial advisors. Nearly one-fifth on the investors give more importance to their own analysis and perception and equal proportion thought that mutual fund managers image has got a major role to play while making mutual fund investment. Different investors have different reasons as per their judgment and assessment. Safety of investment is the major factor which influences their investment and other thinks return or tax benefits as major factors for their investment. Liquidity and conscience is the least factor for mutual fund investment. Analysis of most popular scheme of mutual fund investment reveals that investors like to invest more in growth funds because they wanted to get maximum returns by taking benefit of share market boom. Investors believe that mutual fund fetch more returns as compared to investment in stock market directly. But investment is slightly risky. SELECTED FUNDS ICICI PRU TAX GAIN The scheme seeks to generate long-term capital appreciation by investing approximately 90 per cent of the investments in equity instruments, while the balance 10 per cent would be a parked in debt and money market instrument and cash (Including-money at call). The scheme is managed by Sankaran Naren since October 2005. FRANKLIN INDIA INDEX TAX 10 | P a g e
Equity Linked Savings Schemes
The scheme aims to provide returns that closely correspond to the total return of stocks as represented by S&P CNX Nifty and subject to tracking errors and endeavoring to attain results commensurate with the index. The scheme is managed by Anil Prabhudas since March 2004. FRANKLIN INDIA TAXSHIELD The scheme seeks medium to long term growth of capital, with income tax rebate. The scheme invests in equities and there is an exposure to PSU Bonds and debentures and Money Market instruments. The fund manger of the scheme is Anand Radhakrishnan since August 2007. PRINCIPAL PERSONAL TAX SAVER The scheme seeks capital appreciation with at least 80 per cent exposure to equities, FCDs, preference shares and bonds of companies. The scheme can make investments in money market instruments up to 20 per cent. The scheme offers liquidity through repurchase at NAV. Fund manager : Pankaj Tibrewal since: October 2007. SAHARA TAX GAIN The scheme seeks to provide immediate tax relief and long term capital appreciation through investment primarily in equities. Fund Manager: A N Sridhar Since: February 2007.
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PERFORMANCE EVALUATION
Franklin Principal India Personal Taxshield Tax Saver 1.4% -0.3% 14.06% -12.15% 0.078 0.117 0.006 0.014 0.006 0.007 0.93 1.04 0.01 0.01 0.006 0.007 0.91 0.51 0.98 0.08 11.51% 0.03 0.027 2.34 2.2 0.02 0.03 0.011 30.22% 13.89% 14.99% 180.84 272.3 -1.59 -0.18 12.10% -0.24 -0.234 -2.91 2.37 -0.18 -0.12 0.083 25.59% 16.12% -0.26% 260.46 335.02 Sahara Tax Gain Fund -0.7% -23.08% 0.140 0.019 0.006 0.94 0.01 0.006 0.30 -2.11 -0.31 11.59% -0.35 -0.367 -3.00 2.5 -0.22 -0.23 0.116 28.66% 18.48% 24.19% 1.08 1.7 Franklin India Index Tax 1.3% 11.25% 0.083 0.007 0.007 1.02 0.01 0.007 0.98 0.59 0.05 11.99% -0.01 -0.007 -0.45 1.49 -0.01 0.11 0.016 16.32% 13.36% 6.97% 1.73 3.8 ICICI Prudential Tax Plan 1.7% 15.74% 0.094 0.009 0.007 1.01 0.01 0.007 0.75 1.00 0.09 11.96% 0.04 0.037 0.79 2.13 0.02 0.16 0.048 25.26% 8.38% 8.30% 240.03 -454.51 -BSE Sensex
Average Ret(monthly) CAGR = Rp Standard Deviation Variance Co-Var(P,m) Beta = Covar(p,m)/Var(m) SD mkt * SD fund Co-Var (P-prem,m-prem) R^2 = Cov(prem-f, premm)/SD f*SD m Sharpe's Ratio = (CAGRRf)/SD p Treynor ratio = (CAGRRf)/Beta ER = Rf+b(Rm-Rf) Jenson Alpha = CAGR-ER T^2 = 1/b * P prem - M prem Appraisal ratio = Jenson alpha/Unsys risk Expense Ratio M^2 = (Sp-Sm)* SDm Selectivity = Rp-(Rf+ (bp*Rm - Rf)) Unsys risk = sqrt(Var p b^2*Var m) Returns since inception Returns ( 3yrs Annualised) Returns ( 1 yr) Fund Size (31/12/2008) Fund Size (31/12/2007)
1.3% 11.90% 0.080 0.006 0.006 1.00 0.01 0.006 1.00 0.69 0.06 11.90% 0.00 0.000 0.00 -0.00 0.12 0.000 --
Table 2: Top ELSS performance
ELSS Performance.xlsx
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Equity Linked Savings Schemes
INVESTOR SCENARIO ? ? MF investors constitute a mere 1.6% of population – Out of 321 million individual wage earners between the age of 18 to 59, only 5.3 million invest in mutual funds. 90% of savers have no clue of what a mutual fund is or how to access the markets through the SIP route – shows the tremendous opportunity available for Mutual Funds in general from this growing market of wage earners. SIP Investors - Little more than 2 million small investors of the 20 million who manage to save at these levels in mutual funds have taken up the SIP option.
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CURRENT STATUS AND FUTURE PROSPECTS ? ? ? ? ? ? Distributors in a dilemma over the removal of entry load which was basically the commission paid to them Entry of global mutual fund companies slowdown due to low profitability Domestic mutual fund industry is doing a rethink on its business model even as more acquisitions and consolidation are on the cards Introduction of new distribution channels like Internet directly from the fund house is a good possibility in the near future. Setting up of new type of thematic funds like Emerging economies Fund, Realty Index funds and Mineral Resources funds. Expense ratios will fall: Fewer funds with greater asset bases should create lower expense ratios within the industry, but that is really just the beginning. The growing popularity of ETFs, typically passive vehicles with low management fees, will inspire the actively managed mutual funds to follow suit. There will be fewer, not more, open-ended mutual funds a year from now: The mutual fund industry is still booming, but several factors will keep growth in check. The success of exchange-traded funds (ETFs) will limit the appeal of launching more conventionally traded mutual funds for now, which will slow the creation of new funds. Recent market volatility will also sweep away many of the stinkers, with fund families dusting poor performers under the rug by merging them into more successful funds. That will help consolidate the number of existing vehicles. Commodity based Mutual Funds can be launched to make profit out of price fluctuation in the commodities market and also enhance the investment avenues present for the investor. Short Selling may be allowed for Mutual Funds so that schemes can also use arbitrage avenues available during day trading. 13 | P a g e
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Equity Linked Savings Schemes
BIBLIOGRAPHY www.nseindia.com www.bseindia.com http://www.mutualfundsindia.com/topfund_rpt.asp http://www.amfiindia.com/showhtml.asp?page=mfconcept CMIE Alpha database http://new.valueresearchonline.com/ http://www.icfaipress.org/Books/MutualFundIndustryinIndia_cont.asp http://www.marketwatch.com/tools/mutualfunds/overview http://www.bobshermancredit.com/mutual.fund.overview.htm http://www.crisil.com/financial-news/financial-news-crisil-marketwire-overview.jsp http://www.outlookmoney.com/ http://www.parinda.com/product-reviews/mutual-funds/23590/elss-mutual-funds-equitylinked-savings-schemes-save-tax-under-se http://www.zonkerala.com/articles/equity-linked-saving-scheme.htm http://www.amazines.com/article_detail.cfm/392303?articleid=392303&title=mutual%2Cfund %2Cfinance%2Cconsmers%2Cperception http://www.rediff.com/getahead/2005/jul/20fund.htm
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doc_608691424.docx
The document describes on Equity Linked Saving Schemes (ELSS): Performance Evaluation report.
Equity Linked Savings Schemes
Performance Evaluation Report
This report evaluates the performance of 5 top ELSS benchmarked against BSE Sensex. It describes the tax advantages associated with the scheme. It highlights the issues & marketing challenges faced by the mutual fund.
Equity Linked Savings Schemes
TABLE OF CONTENTS
Basics of an ELSS.................................................................................................................... 3 Mode of Operation ................................................................................................................ 3 Regulatory Aspects ................................................................................................................ 4 Taxation Issues ...................................................................................................................... 6 Target Investors .................................................................................................................... 7 Market Leaders ..................................................................................................................... 8 Marketing Issues ................................................................................................................... 8 Trends in Industry .................................................................................................................. 9 Investor Perception ............................................................................................................. 10 Selected Funds..................................................................................................................... 10 Performance Evaluation ...................................................................................................... 12 Investor Scenario ................................................................................................................. 13 Current Status and Future Prospects .................................................................................... 13 Bibliography ........................................................................................................................ 14
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Equity Linked Savings Schemes
BASICS OF AN ELSS ELSS stands for Equity Linked Savings Schemes. ELSS was introduced in 1990 under the now – repealed Section 88CCB of the Income Tax Act, the scheme is now embraced by Section 80 of the same Act. The duration of such a scheme is ten years, and nay gains made under the scheme will be treated as long – term capital gains. The original investment, up to Rs 10,000 will be added to the investor’s income in the year of receipt. These schemes are run by the Unit Trust of India, LIC, and various banks. In addition, equity-linked instruments carry an inherent market-driven risk. ADVANTAGES OF ELSS OVER NSC AND PPF ? ? ? ? ? ? Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years. Since it is an equity linked scheme earning potential is very high. Investor can opt for dividend option and get some gains during the lock-in period Investor can opt for Systematic Investment Plan Some ELSS schemes also offer personal accident death cover insurance Provides 30 to 40% returns compared to 8% in NSC and PPF
DISADVANTAGES OF ELSS ? ? ? Risk factor is high compared to NSC and PPF Premature withdrawal is not allowed but it is allowed in other instruments in some specific conditions. Lock-in Period of 3 years minimum.
DIVERSIFIED EQUITY SCHEMES AND ELSS Both ELSS and diversified equity scheme operates in same way. Both are high return and high risk schemes. But there is a 3 year lock in period of ELSS and it provides tax benefits too. MODE OF OPERATION 3|Page
Equity Linked Savings Schemes
An ELSS is the mirror image of a diversified equity fund1. This means the fund manager will invest in shares of various companies across various industries. What sets it apart is the added tax benefit, something a diversified equity fund does not offer. ELSS funds have a lock-in period of three years. This could be restricting, but look at the other side of the picture -- the lock-in period prevents unnecessary withdrawals and helps one’s money grow over a period of time. A three-year lock-in period is necessary because one needs to take a long-term view when investing in equity. The real potential of equities starts to show only after a few years. This allows one to ignore the short-term slumps and stay invested for the long haul. SYSTEMATIC INVESTMENT PLAN Best way to invest in ELSS is through Systematic Investment Plan(SIP). With SIP you can invest a small amount every month for a specific time period. With SIP investor can take advantage of fluctuations in the stock market. So investor will get more units when the market is down and get less units when the market is up. For eg if you are investing Rs 1000 every month and you will get 100 units for when Net Asset Value (NAV) is 10 and will get 50 units when NAV is 20. So investing a fixed sum regularly helps to cover the market fluctuations by rupee costs averaging. Also most of the Asset Management Companies (AMC) charges less entry load for SIP compared to normal purchase. REGULATORY ASPECTS SCHEMES OF A MUTUAL FUND The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees.
1
A mutual fund that invests in the stocks of various companies of various sectors.
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Equity Linked Savings Schemes
The offer document shall contain disclosures, which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to make by the scheme in the listed securities of the group companies of the sponsor a close-ended scheme shall fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution". The mutual fund and asset management company shall be liable to refund the application money to the applicants,(i) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (1); (ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1). RULES REGARDING ADVERTISEMENT: The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. GENERAL OBLIGATIONS: The financial year for all the schemes shall end as of March 31 of each year. Every mutual fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. RESTRICTIONS ON INVESTMENTS: A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency 5|Page
Equity Linked Savings Schemes
authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. TAXATION ISSUES ? ? Investments in ELSSs fall under Section 80C of Income Tax Act The limit under this section is Rs 100,000. This is irrespective of how much you earn and under which tax bracket you fall. o Also, there are no sub-limits under this overall Rs 100,000 amount. ? One can invest the entire amount in ELSS or infrastructure bonds. How you utilise the limit of Rs 100,000 is entirely up to the individual investor. ? ? The dividends that the investor earns in an ELSS are tax free in his hands. When one sells the units of these funds, one can benefit from long-term capital gain, under which one don't have to pay capital gains tax. SECTION 80C Section 80C has a lot more purpose and meaning from the long-term perspective of taxability of investments than the earlier Section 88 rebate. Section 80C replaces the existing Section 88 with more or less the same investment mix available in Section 88 but with a major change in the method of providing a tax benefit. If you have a taxable income of Rs.6,00,000. You can invest Rs.1 lakh in a tax saving mutual fund and your taxable income comes down to Rs.5,00,000. This is very useful if you're in the highest tax bracket. By investing Rs.1 lakh in ELSS mutual funds you save on the tax to be paid on it, which is Rs.33,360. This is why you see large ads every year in the last quarter of the year inviting you to invest in ELSS and 'save upto Rs.33,360'. Tax saving mutual fund schemes are offered by all assetmanagement companies (AMCs) including Reliance, HDFC, Tata, Franklin Templeton, ICICI Prudential etc Here's how it works.
6|Page
Equity Linked Savings Schemes
CBDT CLARIFICATION ON ELSS The text of the CBDT’s clarification is: "The Equity-Linked Savings Scheme, 2005, has been notified vide S.O. No. 1563(E) dated 3 November 2005. The Central Board of Direct Taxes has clarified that investments made on or after 1st April, 2005, in plans, which are in accordance with ELSS 1992 or ELSS 1992 as amended in 1998 are also eligible for tax benefit under Section 80C of the Income Tax Act, 1961." TARGET INVESTORS The Swarna scheme will be investing primarily in physical Gold and therefore the ideal investor class would be who like to invest in gold because of its specific characteristics namely: ? ? ? Growth independent of the economic cycles Long investment cycles Low volatility
This scheme has also been made into an exchange traded scheme, so that the investor has the liquidity provided by equities therefore removing the biggest disadvantage of general mutual funds in which liquidity is always a problem. The investor in his earning phase can invest small amounts at a regular interval since the scheme offers SIP & similarly, sell the units in case of need as it offers SWP as well. A typical investor would be: ? ? ? ? ? ? ? Age above 30 yrs and in earning phase Looking for long term appreciation & not regular income like dividend etc. Has a housing loan Providing for children education Planning for child’s wedding Takes care of old parents Planning for retirement 7|Page
Equity Linked Savings Schemes
MARKET LEADERS The top 15 ELSS schemes are:
Rank Scheme Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Taurus Taxshield - Growth Sundaram BNP Paribas Taxsaver - (Open Ended Fund) - Growth Sahara Taxgain - Growth Fidelity Tax Advantage Fund - Growth Principal Personal Taxsaver SBI Magnum Tax Gain 93 - Growth Franklin India Taxshield - Growth Franklin India Index Tax Fund HDFC Taxsaver - Growth Reliance Tax Saver Fund - Growth Kotak Taxsaver - Growth Baroda Pioneer ELSS 96 HDFC Long Term Advantage - Growth Tata Tax Saving Fund UTI Equity Tax Savings Plan - Growth NAV (Rs.) 27.53 36.7 28.02 15.41 77.16 49.4 152.4 35.76 161.93 15.31 14.45 21.61 99.25 43.87 32 Last Years 25.29 21.22 18.47 17.27 16.11 14.38 13.88 13.34 12.18 12.11 11.84 11.57 10.66 10.65 9.02 3 Since Inception 13.74 17.23 28.66 13.47 25.59 14.89 30.22 16.32 25.33 11.82 10.47 11.86 30.66 20.47 15.1
Table 1 : Top 15 ELSS (Source:www.mutualfundsindia.com)
MARKETING ISSUES MARKETING CODE The marketing code aims at preventing from using deceptive statements and publicity to attract investors. According to the guidelines: ? ? ? ? The content of advertisements should be verifiable from the offer document. Any forecast of NAV or growth or returns would be considered misleading unless backed by adequate reserve funds or guarantees by sponsors/third parties. Any advertisement or sales literature giving returns, growth etc not calculated as per guideline would be considered misleading AMC cannot claim about capabilities not supported by track record of three years. 8|Page
Equity Linked Savings Schemes
? ? Offer document should precede any advertisements or literature. For schemes existing for >1 yr, annualized yield should be presented.
PROBLEMS ? ? ? The marketing agent for the mutual funds has no role in the day to day activities and investment decisions of the funds. Investment in mutual funds is subject to market risks and past performance is no guarantee towards future performance. Investors need to be educated.
SKILL FORMATION AND INVESTOR EDUCATION ? Certification to operate: It is mandatory for agents to have certification to operate. The certification test is designed by AMFI & is a part of NSE certification in the Financial market. Investor education program: The investor education program led by UTI Institute of Capital Market is designed to spread awareness among investors.
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TRENDS IN INDUSTRY Product innovation is now passé with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible. The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generations of private funds, which have gained substantial mass, are now flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry. Rewarding honest and transparent management with higher valuations has created a system of riskreward created where the corporate sector is more transparent then before. Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are improving. What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds.
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INVESTOR PERCEPTION The confidence level of the investors in the stock market and mutual funds is almost the same. Nearly two-third of the investors demonstrate moderate confidence level in the stock market investment. On the other hand, nearly seven-tenth of the investors demonstrate moderate confidence level in mutual funds. Nearly one-fifth of the investors demonstrate high level of the confidence in opting both the stock market as well as mutual funds. It implies that investors are ready to park their money which promise high returns. Nearly one-half of the investors prefer to keep their investment in mutual funds from one to three years. Investors do not want long term investment due to delayed realization of returns. Likewise, investors did not invest in one year mutual funds because of greater risk involved in them. Hence investors are interested to keep investment for an average period in mutual funds. Analysis of micro factors influencing mutual funds reveals that one –third(highest) of the investors prefer to invest on the recommendations of their friends and relatives while onefourth of the investors depends upon the recommendation of their financial advisors. Nearly one-fifth on the investors give more importance to their own analysis and perception and equal proportion thought that mutual fund managers image has got a major role to play while making mutual fund investment. Different investors have different reasons as per their judgment and assessment. Safety of investment is the major factor which influences their investment and other thinks return or tax benefits as major factors for their investment. Liquidity and conscience is the least factor for mutual fund investment. Analysis of most popular scheme of mutual fund investment reveals that investors like to invest more in growth funds because they wanted to get maximum returns by taking benefit of share market boom. Investors believe that mutual fund fetch more returns as compared to investment in stock market directly. But investment is slightly risky. SELECTED FUNDS ICICI PRU TAX GAIN The scheme seeks to generate long-term capital appreciation by investing approximately 90 per cent of the investments in equity instruments, while the balance 10 per cent would be a parked in debt and money market instrument and cash (Including-money at call). The scheme is managed by Sankaran Naren since October 2005. FRANKLIN INDIA INDEX TAX 10 | P a g e
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The scheme aims to provide returns that closely correspond to the total return of stocks as represented by S&P CNX Nifty and subject to tracking errors and endeavoring to attain results commensurate with the index. The scheme is managed by Anil Prabhudas since March 2004. FRANKLIN INDIA TAXSHIELD The scheme seeks medium to long term growth of capital, with income tax rebate. The scheme invests in equities and there is an exposure to PSU Bonds and debentures and Money Market instruments. The fund manger of the scheme is Anand Radhakrishnan since August 2007. PRINCIPAL PERSONAL TAX SAVER The scheme seeks capital appreciation with at least 80 per cent exposure to equities, FCDs, preference shares and bonds of companies. The scheme can make investments in money market instruments up to 20 per cent. The scheme offers liquidity through repurchase at NAV. Fund manager : Pankaj Tibrewal since: October 2007. SAHARA TAX GAIN The scheme seeks to provide immediate tax relief and long term capital appreciation through investment primarily in equities. Fund Manager: A N Sridhar Since: February 2007.
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PERFORMANCE EVALUATION
Franklin Principal India Personal Taxshield Tax Saver 1.4% -0.3% 14.06% -12.15% 0.078 0.117 0.006 0.014 0.006 0.007 0.93 1.04 0.01 0.01 0.006 0.007 0.91 0.51 0.98 0.08 11.51% 0.03 0.027 2.34 2.2 0.02 0.03 0.011 30.22% 13.89% 14.99% 180.84 272.3 -1.59 -0.18 12.10% -0.24 -0.234 -2.91 2.37 -0.18 -0.12 0.083 25.59% 16.12% -0.26% 260.46 335.02 Sahara Tax Gain Fund -0.7% -23.08% 0.140 0.019 0.006 0.94 0.01 0.006 0.30 -2.11 -0.31 11.59% -0.35 -0.367 -3.00 2.5 -0.22 -0.23 0.116 28.66% 18.48% 24.19% 1.08 1.7 Franklin India Index Tax 1.3% 11.25% 0.083 0.007 0.007 1.02 0.01 0.007 0.98 0.59 0.05 11.99% -0.01 -0.007 -0.45 1.49 -0.01 0.11 0.016 16.32% 13.36% 6.97% 1.73 3.8 ICICI Prudential Tax Plan 1.7% 15.74% 0.094 0.009 0.007 1.01 0.01 0.007 0.75 1.00 0.09 11.96% 0.04 0.037 0.79 2.13 0.02 0.16 0.048 25.26% 8.38% 8.30% 240.03 -454.51 -BSE Sensex
Average Ret(monthly) CAGR = Rp Standard Deviation Variance Co-Var(P,m) Beta = Covar(p,m)/Var(m) SD mkt * SD fund Co-Var (P-prem,m-prem) R^2 = Cov(prem-f, premm)/SD f*SD m Sharpe's Ratio = (CAGRRf)/SD p Treynor ratio = (CAGRRf)/Beta ER = Rf+b(Rm-Rf) Jenson Alpha = CAGR-ER T^2 = 1/b * P prem - M prem Appraisal ratio = Jenson alpha/Unsys risk Expense Ratio M^2 = (Sp-Sm)* SDm Selectivity = Rp-(Rf+ (bp*Rm - Rf)) Unsys risk = sqrt(Var p b^2*Var m) Returns since inception Returns ( 3yrs Annualised) Returns ( 1 yr) Fund Size (31/12/2008) Fund Size (31/12/2007)
1.3% 11.90% 0.080 0.006 0.006 1.00 0.01 0.006 1.00 0.69 0.06 11.90% 0.00 0.000 0.00 -0.00 0.12 0.000 --
Table 2: Top ELSS performance
ELSS Performance.xlsx
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INVESTOR SCENARIO ? ? MF investors constitute a mere 1.6% of population – Out of 321 million individual wage earners between the age of 18 to 59, only 5.3 million invest in mutual funds. 90% of savers have no clue of what a mutual fund is or how to access the markets through the SIP route – shows the tremendous opportunity available for Mutual Funds in general from this growing market of wage earners. SIP Investors - Little more than 2 million small investors of the 20 million who manage to save at these levels in mutual funds have taken up the SIP option.
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CURRENT STATUS AND FUTURE PROSPECTS ? ? ? ? ? ? Distributors in a dilemma over the removal of entry load which was basically the commission paid to them Entry of global mutual fund companies slowdown due to low profitability Domestic mutual fund industry is doing a rethink on its business model even as more acquisitions and consolidation are on the cards Introduction of new distribution channels like Internet directly from the fund house is a good possibility in the near future. Setting up of new type of thematic funds like Emerging economies Fund, Realty Index funds and Mineral Resources funds. Expense ratios will fall: Fewer funds with greater asset bases should create lower expense ratios within the industry, but that is really just the beginning. The growing popularity of ETFs, typically passive vehicles with low management fees, will inspire the actively managed mutual funds to follow suit. There will be fewer, not more, open-ended mutual funds a year from now: The mutual fund industry is still booming, but several factors will keep growth in check. The success of exchange-traded funds (ETFs) will limit the appeal of launching more conventionally traded mutual funds for now, which will slow the creation of new funds. Recent market volatility will also sweep away many of the stinkers, with fund families dusting poor performers under the rug by merging them into more successful funds. That will help consolidate the number of existing vehicles. Commodity based Mutual Funds can be launched to make profit out of price fluctuation in the commodities market and also enhance the investment avenues present for the investor. Short Selling may be allowed for Mutual Funds so that schemes can also use arbitrage avenues available during day trading. 13 | P a g e
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BIBLIOGRAPHY www.nseindia.com www.bseindia.com http://www.mutualfundsindia.com/topfund_rpt.asp http://www.amfiindia.com/showhtml.asp?page=mfconcept CMIE Alpha database http://new.valueresearchonline.com/ http://www.icfaipress.org/Books/MutualFundIndustryinIndia_cont.asp http://www.marketwatch.com/tools/mutualfunds/overview http://www.bobshermancredit.com/mutual.fund.overview.htm http://www.crisil.com/financial-news/financial-news-crisil-marketwire-overview.jsp http://www.outlookmoney.com/ http://www.parinda.com/product-reviews/mutual-funds/23590/elss-mutual-funds-equitylinked-savings-schemes-save-tax-under-se http://www.zonkerala.com/articles/equity-linked-saving-scheme.htm http://www.amazines.com/article_detail.cfm/392303?articleid=392303&title=mutual%2Cfund %2Cfinance%2Cconsmers%2Cperception http://www.rediff.com/getahead/2005/jul/20fund.htm
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