As another new year begins, it is also time for investors to finalize the tax planning investments for the current fiscal year. Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C, since the investors can avail double benefits of capital appreciation and tax savings. An ELSS is a diversified equity scheme with a lock in period of three years from the date of the investment. If you invest in an ELSS through a systematic investment plan (SIP), each investment will be locked in for 3 years from their respective investment dates. From tax purposes, both long term capital gains and dividends from ELSS are tax free.

Equity Linked Saving Schemes (ELSS) as a category of funds has given very good returns historically. Over various periods ELSS funds have in fact, generated better returns than Large Cap Funds as a category. The lock-in period of three years in ELSS is advantageous from a fund management perspective, since the fund managers are free from redemption pressures and therefore are able to hold the stocks in their portfolio for a longer period of time, to generate superior returns. See the chart below, for the comparison of annualized returns over three, five, seven and ten year periods, between ELSS and the large cap funds categories (NAVs as on Jan 5 2015)

DSP BlackRock TaxSaver Fund, launched in November 2006, has delivered over 15% returns since inception and has outperformed in the ELSS funds category across several time periods. See the chart below, for the comparison of annualized returns over one, three, five and ten year periods, between DSP BlackRock Tax Saver Fund and the ELSS Category (NAVs as on Jan 5 2015).

DSP BlackRock Tax Saver Fund – Fund Overview

This fund is suitable for investors looking for tax planning investment options under Section 80C with the expectation of long term capital appreciation. However, since this is essentially an equity oriented mutual fund, it is subject to market risk and volatility, compared to other tax saving instruments like PPF, NSC etc. However, equities as an asset class generate superior returns over the long term and serves as an effective hedge against inflation. As such the fund is suitable for investors planning for long term financial objectives like retirement planning. The fund has an AUM base of over र 1,000 crores, with an expense ratio of 2.58%. The fund manager of this scheme is Apoorva Shah.

Portfolio Construction

The fund manager has large cap and high growth potential focus for his portfolio. From a sector perspective, the portfolio has a BFSI bias, with substantial allocations also to IT, Automobile, Oil & Gas and Pharmaceuticals. This portfolio construction enables the fund manager to generate good returns across different market cycles. In terms of company concentration, the portfolio is very well diversified with its top 5 holdings, SBI, ICICI Bank, Infosys, HDFC Bank and L&T accounting for less than 22% of the total portfolio value. Even in terms of top 10 holdings of the portfolio account for less than 55%.

Risk & Return

In terms of risk or volatility measures, the annualized standard deviation of monthly returns for three years is 15.7%, which is lower than the volatility of ELSS category. While the volatility of the fund is lower than the category average, the annualized returns over the same periods are better than the category, indicative of strong risk adjusted returns performance from this fund. On a risk adjusted returns basis, as measured by Sharpe Ratio, the fund has outperformed the small and midcap funds category. Sharpe ratio is defined as the ratio of excess return (i.e. difference of return of the fund and risk free return from Government securities) and annualized standard deviation of returns. Higher the Sharpe ratio better is the risk adjusted performance of the fund. The Sharpe ratio of the DSP BlackRock Tax Saver Fund is 1.4, while that of the diversified equity fund category is 1.04.

Comparison with Peer Set

In terms of peer set within the ELSS category, the performance of DSP BlackRock Tax Saver Fund compares well with the top funds in the category. The chart below shows the comparison of annualized returns over one, two, three and five year periods, of top performing ELSS funds. The chart shows that the DSP BlackRock Tax Saver fund belongs in the top league of ELSS Funds.

Lump Sum and SIP Returns

र 1 lac lump sum investment in the fund NFO (growth option) would have tripled in value to be at over र 3.1 lacs as on Jan 5 2015. The chart below shows the growth of र 1 lac investment in the DSP BlackRock Tax Saver Fund (Growth Option).

The chart below shows the returns since inception of र 3000 monthly SIP in the DSP BlackRock Tax Saver Fund. The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Jan 5 2015.

The chart above shows that a monthly SIP of र 3,000 started at inception of the DSP BlackRock Tax Saver Fund (Growth Options) would have grown to over र 6.2 lacs by Jan 5 2015, while the investor would have invested in total only र 2.9 lacs. The SIP return is nearly 24% since inception.

Conclusion

The DSP BlackRock Tax Saver fund has delivered nearly 8 years of strong and consistent performance. Investors planning for tax saving investments can consider buying the scheme through the systematic investment plan (SIP) or lump sum route with a long time horizon, for long term financial objectives. However, investors should ensure that the objectives of the fund are aligned with their individual risk profiles and time horizons. They should consult with their financial advisors if DSP BlackRock Tax Saver fund is suitable for their investment portfolio.