Reliance Tax Saver Fund (ELSS)
Fund Manager: Mr Sanjay Parekh
Category: ELSS (Tax Saving)
Date of
Inception: 21
September 2005
Benchmark: S&P BSE 200 India TR INR
What is Reliance Tax Saver Fund?
Reliance Tax Saver Fund,
now Nippon Tax Saving Fund is one of the oldest elss funds also having the second highest AUM in the tax saving mutual funds category.
Despite these two
noteworthy points, what is interesting is that reliance tax saver has actually been one
of the severe underachievers in the elss funds category.
The obvious question that
arises therefore is how come this tax saving fund is still able to attract and maintain the number two position with respect to AUM.
It is indeed somewhat of
an aberration that in a country like India that is still at a nascent stage of
equity investing and obsessed with past returns, an underachieving fund like Reliance Tax Saver Fund still
manages to garner a sizeable AUM.
Reliance Tax Saver Fund Analysis
- At the outset let’s be very clear that this is not merely just another tax saving mutual fund.
- Now whether that actually amounts to being an advantage for its investors is not really much of a debate when you consider its historical performance and investing style.
- The fund being a lock in fund tends to have a bit more flexibility with regards to its style.
- Unlike most other elss tax saving mutual funds, reliance tax saver prefers the value investing style over growth.
Investing style of Reliance Tax Saver Fund
- The fund as previously mentioned prefers a value investing style over growth style.
- This simply means it looks for stocks which it believes are at a great valuation at the present moment.
‘’Buying the right business makes you money but buying the right business at the right price makes you wealth.’’
This approach does have the potential to outperform its
peers but at the same time undertakes risks it could have done away with. It
certainly is a double edged sword but then again that’s the very nature of
equity investing.
This approach demands
two very specific points that needs to make sure it’s a smooth road for the
investors:
- Firstly there needs to be an experienced fund manager at the helm since value investing is not merely looking at prices but rather acting on them and therefore only someone who’s experienced enough can successfully navigate through the various market cycles.
- Secondly an investor needs to be aware the style the fund manager will apply before investing. This is primarily because no one particular strategy can suit the general public at large. Personal finance as the name suggests is personal and not general. Unfortunately investors as often seen in past invest purely on the basis of past returns, without any concern for risk profiling.
In case you
realize the fund strategy does not align with what you are looking for, it
leads to several avoidable issues like exit load, taxation, etc. To make
matters worse, elss mutual funds come with a lock in period of 3 years since the
date of investment.
How good is Reliance Tax Saver Fund?
There’s not much to write home about its performance which
has been utterly disappointing to say the least.
The table below will attest to that.
1,000 is considered as the monthly SIP amount for the above calculation. |
As can be seen from the table above, even after investing
via SIP for a period of 5 years you would still be reeling under losses. This
is acceptable only when the rest of the elss funds also mirror similar to same
performances but that’s certainly not so the case.
Additional reading: Click Here to read what went wrong with HDFC Balanced Advantage Fund
Why Reliance Tax Saver Fund has been such a
disappointment?
A)Investing Style
- The fund as mentioned applies the value investing style over growth style.
- As a developing economy there is no doubt that opportunities are plenty with regards to valuations. FII flows are a testament to that but institutional investors and retail investors have their own unique set of challenges.
- A value investing style would imply the ability to stick through long periods of little to no movement, the ability to pick stocks way below their intrinsic price, to be able to ascertain as to when a stock has fulfilled its potential and it’s time to move on, etc.
B) Value Style vs Growth
Style
- A value investing style looks good on paper but there is no guarantee that it will take off. This is the case with any approach you take in equities but more so when it comes to a value investing approach.
- There is no mandatory ruling which calls to apply this method. Tax saving funds which use the growth style have benefited immensely, not all but mostly. Even the ones that have under-performed have managed to do better than Reliance Tax Saver Fund.
What is noteworthy here is that even funds that have
predominantly looked at mid & small cap stocks have successfully
outperformed Reliance Tax Saver Fund.
As can be seen from the above image, the fund has taken a
higher exposure to large cap stocks as on 31st October 2019. One can
argue that the higher exposure to mid & small cap stocks has lead to its
downfall but in reality other schemes with similar exposure have done
relatively well.
Where it has gone woefully wrong is in trying to predict the
value of these very mid & small cap stocks with respect to their current
market prices.
This is precisely why mid & even some small cap schemes have
outshone it.
Sector
|
Fund
|
Category Average
|
Consumer Cyclical
|
21.58%
|
11.71%
|
Energy
|
9.95%
|
6.95%
|
As can be seen from the table, the fund has taken a higher exposure
to Consumer Cyclical and Energy as compared to the category average.
Here’s why this makes
a huge difference:
- Consumer cyclical goods and Energy are highly volatile in nature.
- The myth of the consumption theme being an evergreen one has also been clearly busted in 2018 and more severely in 2019.
- When you go for sectors that are highly volatile in nature, they also naturally tend to be the first to feel the shocks of a slowdown and in almost all cases, the most severe to be hit.
- It is one thing to take exposure to mid and small cap stocks but such heavy exposure can be detrimental unless it comes off.
- Aswani Kumar, the previous fund manager was historically more biased towards mid & small cap stocks in his overall portfolio.
- This meant a high probability of investing in less liquid stocks due to the lock in period of 3 years. Empirical evidence of the same could be interpreted by his lower exposure to large cap stocks.
- It is one thing to visualize an idea but completely another to execute it successfully.
- With heavy exposure towards mid and small cap stocks, one would have assumed the fund to be on par with mid and small stocks during a rally and provide better stability than them during a market slowdown but that was far from reality.
But neither has been the case, as can be witnessed by the
table below.
Scheme
|
Category
|
2017
|
2018
|
HDFC
Small Cap
|
Small
Cap
|
60.75%
|
-8.04%
|
L&T
Small cap
|
Small
Cap
|
66.50%
|
-13.65%
|
Reliance
Tax Fund
|
Tax
Saving
|
46.04%
|
-20.58%
|
Mr Sanjay Parekh has been named as the Fund Manager for Nippon Tax Saver Fund from July 2020.
Additional reading: Click Here to read our complete review of Principal Emerging Bluechip Fund mutual fund
Future of Reliance Tax Saver Fund:
- The Reliance Tax Saver Fund has under-performed both the small cap funds during a bull phase as well as a bear phase.
- This begs the question, if the fund cannot outperform schemes with a similar strategy during a bull phase nor provide stability during a bear phase then what purpose does it exactly serve?
- One could argue that it’s unfair to compare the fund with another category but then again this comparison has been prompted due it applying a strategy that no other elss fund is.
Is it good to invest in ELSS funds?
In one word, Yes.
Elss mutual funds have the lowest lock in period among all the tax saving instruments.
Which ELSS is best to invest?
- There is no such thing as the best ELSS to invest.
- No one tax saving fund can be consistently at the top all the time.
- Trying to figure one is merely a waste of time.
- You need to find one that suits you rather than one that’s the best.
This again would be dependent on various factors as
mentioned below:
- Fund Manager
- Investing style applied
- Top sector holdings and stock holdings etc.
ELSS (Tax Saving funds) is a great way to not only save
taxes but also avail the benefits of equity growth. Very rarely do investors actually study the various factors to arrive at a reasonable solution. Investing
merely on the basis of past returns and star ratings is a sure shot way to let
your hard earned money go down the drain. You need a goal, a plan to achieve
that goal and a proper set of resources to make that plan.
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