Reia Derina Rebelo
Commerce
Faculty, Rosary College of Commerce & Arts, Navelim,
Salcete-Goa
ABSTRACT
Mutual funds are the financial intermediaries that pool
money from small investors and then they invest into different investment avenues.
The mutual fund industry has seen an upward trend since 1963. The growth in the
industry is seen due to the rise in private fund houses, increase in awareness
by various fund houses and so on. Many investors have shifted their investments
to mutual fund due to a higher growth potential of earning income and capital appreciation.
ELSS is a tax saving Investment Avenue that is available to investors under
section 80 C of income tax Act, 1961. The objective of this paper is to study
the performance of ELSS on the basis of returns & risk adjusted measures
and to know the degree of risk involved in ELSS. The Findings of this study
will be useful to investors for their future investment decisions with respect
to the selection of the ELSS schemes.
Key words: Mutual
funds; ELSS & risk adjusted measures
1.
INTRODUCTION
Mutual funds
are financial intermediaries that pool the savings from the small investors and
then invest them into different securities. A mutual fund is a type of investment
in which investors pool their money
together to buy a portfolio of stocks,
bonds or other securities in order
to take advantage of diversification and professional portfolio management at a
reasonable cost. (What is a Mutual
Fund?n.d.).
Mutual funds
offer a wide variety of choice to investors such as Equity Funds, Equity Linked
Savings Scheme (ELSS), Debt Funds, Liquid Funds, and Children Gift Funds and so
on. Mutual Funds are easily accessible and one can start investing in mutual funds from
anywhere in the world. An Asset Management Company (AMC) offers the funds and
distributes through channels like Brokerage Firms, Registrars like Karvy and
CAMS, AMC’s, Online Mutual Fund Investment Portal,
Agents and Banks (What Are The Advantages And Benefits Of Mutual Funds In India?, 2020). One can also transact mutual
funds from NSE NMF
platform
and also from BSE platform, known as BSE Star. From NSE NMF, one can invest in
mutual funds only after registering on the platform. Once, the investor is
registered on the NSE NMF platform, one can
perform a number of financial transactions such as new fund purchase,
fresh purchase, additional purchase, redemption, switch transaction, systematic
investment plan (SIP), systematic transfer plan (STP), systematic withdrawal
plan (SWP) and non-financial transactions. Such platform also provide multiple
payment options to an investor such as Cheque/ Demand Draft, RTGS / NEFT
transfers, internet banking, Debit Card and ECS Mandate(NSE- Mutual Fund
Platform, n.d.).
There are
two ways of investing in mutual fund
schemes – either by systematic investment plan (SIP) or via Lump Sum. SIP means investing a fixed sum of money regularly. On the other hand, in Lump Sum, the entire sum of money is invested at one time. An investor will
make good returns when he/she invests in mutual
funds through SIP than via Lump-sum.
A SIP
enables one to lower the average cost of investments and also reduces the risk
of investment. This is possible through rupee-cost averaging. A SIP enables one
to regularly increase the investment by a fixed amount and get the benefit of
compounding as one earn returns on the returns generated by investments (Lump
Sum or SIP – Which Will Give You Better Returns?, n.d.).
Many
investors prefer to invest in mutual
funds in order to save their income from taxes. Investors have to invest in Equity
Linked Savings Scheme in order to
claim deduction for a sum of Rs. 1, 50,000 from taxable income under section
80C of Income Tax Act, 1961. Such tax saving scheme has the
potential to deliver good returns in the long run. Although risky,
investment in ELSS has the potential
to deliver significantly higher returns when compared to traditional tax saving
instruments. Moreover, ELSS has the lowest lock-in period of three years which
is lower than other tax saving avenues like NSC, PPF etc. (What is ELSS: Benefits, Taxation, Investment
Guide & Returns,n.d.).
ELSS schemes
are mostly invested in equity instruments. This will in turn provide a good
chance of capital appreciation. An investor can get a lot of benefits through
ELSS schemes like diversification is one of the biggest benefits that the
investor can get as it invests in different companies of small-cap to large-cap
and across various sectors. Most ELSS schemes allow investors to invest a small
amount of Rs. 500 via SIP mode.
An investor
should know some important concepts such as NAV, NFO, and AUM. NAV is the price
of a single unit of the fund. When an Asset Management Company (AMC) launches a
new scheme, it invites investment from people through an initial offer for
subscription. This offer is known as a New Fund offer (NFO) (Basic Terms &
Concepts of Mutual Funds, n.d.). A mutual fund pools money from investors and
uses this money to buy assets like stocks, bonds and other securities.
The total value of the assets a
fund buys is called the assets under management (AUM) (All you need to know
before investing in Mutual Funds, n.d.).Mutual fund industry has witnessed a
rising growth over the years due to increase in the private fund houses, rise in awareness
spread by the fund houses, increase in SIP investments, and improvement in
performance by the various schemes and so on. Many investors have shifted their
investments from the saving bank account to liquid funds as it can fetch a higher
return than a normal saving bank account. The wide variety of choices available
to investors is another reason behind rise in investments in mutual fund
industry. If one wants to buy some shares but has lack of knowledge of how the
stock market works, then mutual funds is the best option as it is managed by
professionals.
Reia Derina Rebelo
Commerce
Faculty, Rosary College of Commerce & Arts, Navelim,
Salcete-Goa
ABSTRACT
Mutual funds are the financial intermediaries that pool
money from small investors and then they invest into different investment avenues.
The mutual fund industry has seen an upward trend since 1963. The growth in the
industry is seen due to the rise in private fund houses, increase in awareness
by various fund houses and so on. Many investors have shifted their investments
to mutual fund due to a higher growth potential of earning income and capital appreciation.
ELSS is a tax saving Investment Avenue that is available to investors under
section 80 C of income tax Act, 1961. The objective of this paper is to study
the performance of ELSS on the basis of returns & risk adjusted measures
and to know the degree of risk involved in ELSS. The Findings of this study
will be useful to investors for their future investment decisions with respect
to the selection of the ELSS schemes.
Key words: Mutual
funds; ELSS & risk adjusted measures
1.
INTRODUCTION
Mutual funds
are financial intermediaries that pool the savings from the small investors and
then invest them into different securities. A mutual fund is a type of investment
in which investors pool their money
together to buy a portfolio of stocks,
bonds or other securities in order
to take advantage of diversification and professional portfolio management at a
reasonable cost. (What is a Mutual
Fund?n.d.).
Mutual funds
offer a wide variety of choice to investors such as Equity Funds, Equity Linked
Savings Scheme (ELSS), Debt Funds, Liquid Funds, and Children Gift Funds and so
on. Mutual Funds are easily accessible and one can start investing in mutual funds from
anywhere in the world. An Asset Management Company (AMC) offers the funds and
distributes through channels like Brokerage Firms, Registrars like Karvy and
CAMS, AMC’s, Online Mutual Fund Investment Portal,
Agents and Banks (What Are The Advantages And Benefits Of Mutual Funds In India?, 2020). One can also transact mutual
funds from NSE NMF
platform
and also from BSE platform, known as BSE Star. From NSE NMF, one can invest in
mutual funds only after registering on the platform. Once, the investor is
registered on the NSE NMF platform, one can
perform a number of financial transactions such as new fund purchase,
fresh purchase, additional purchase, redemption, switch transaction, systematic
investment plan (SIP), systematic transfer plan (STP), systematic withdrawal
plan (SWP) and non-financial transactions. Such platform also provide multiple
payment options to an investor such as Cheque/ Demand Draft, RTGS / NEFT
transfers, internet banking, Debit Card and ECS Mandate(NSE- Mutual Fund
Platform, n.d.).
There are
two ways of investing in mutual fund
schemes – either by systematic investment plan (SIP) or via Lump Sum. SIP means investing a fixed sum of money regularly. On the other hand, in Lump Sum, the entire sum of money is invested at one time. An investor will
make good returns when he/she invests in mutual
funds through SIP than via Lump-sum.
A SIP
enables one to lower the average cost of investments and also reduces the risk
of investment. This is possible through rupee-cost averaging. A SIP enables one
to regularly increase the investment by a fixed amount and get the benefit of
compounding as one earn returns on the returns generated by investments (Lump
Sum or SIP – Which Will Give You Better Returns?, n.d.).
Many
investors prefer to invest in mutual
funds in order to save their income from taxes. Investors have to invest in Equity
Linked Savings Scheme in order to
claim deduction for a sum of Rs. 1, 50,000 from taxable income under section
80C of Income Tax Act, 1961. Such tax saving scheme has the
potential to deliver good returns in the long run. Although risky,
investment in ELSS has the potential
to deliver significantly higher returns when compared to traditional tax saving
instruments. Moreover, ELSS has the lowest lock-in period of three years which
is lower than other tax saving avenues like NSC, PPF etc. (What is ELSS: Benefits, Taxation, Investment
Guide & Returns,n.d.).
ELSS schemes
are mostly invested in equity instruments. This will in turn provide a good
chance of capital appreciation. An investor can get a lot of benefits through
ELSS schemes like diversification is one of the biggest benefits that the
investor can get as it invests in different companies of small-cap to large-cap
and across various sectors. Most ELSS schemes allow investors to invest a small
amount of Rs. 500 via SIP mode.
An investor
should know some important concepts such as NAV, NFO, and AUM. NAV is the price
of a single unit of the fund. When an Asset Management Company (AMC) launches a
new scheme, it invites investment from people through an initial offer for
subscription. This offer is known as a New Fund offer (NFO) (Basic Terms &
Concepts of Mutual Funds, n.d.). A mutual fund pools money from investors and
uses this money to buy assets like stocks, bonds and other securities.
The total value of the assets a
fund buys is called the assets under management (AUM) (All you need to know
before investing in Mutual Funds, n.d.).Mutual fund industry has witnessed a
rising growth over the years due to increase in the private fund houses, rise in awareness
spread by the fund houses, increase in SIP investments, and improvement in
performance by the various schemes and so on. Many investors have shifted their
investments from the saving bank account to liquid funds as it can fetch a higher
return than a normal saving bank account. The wide variety of choices available
to investors is another reason behind rise in investments in mutual fund
industry. If one wants to buy some shares but has lack of knowledge of how the
stock market works, then mutual funds is the best option as it is managed by
professionals.
2.
REVIEW OF LITERATURE
Lilly J. &Anusuya D. (2014)
analysed the performance of selected ELSS Mutual fund schemes. They found that
the LIC Nomura MF Tax plan growth and dividend schemes has outperformed well in
the market when compared to other tax saving ELSS schemes. They have also found
that only one scheme i.e. LIC Nomura MF Tax plan growth and dividend schemes
has recorded the highest Sharpe, treynor& the sortino ratio. This shows
that LIC Nomura Tax plan scheme can borne an adequate amount of risk when
compared to other schemes.
Pathak R. (2018)
analysed on the performance evaluation of ELSS Mutual fund schemes with special
reference to Growth funds. It has found that ELSS –Growth funds have
outperformed the benchmark index. Moreover there are funds like Axis long term
equity funds, IDFC Tax advantage and Franklin Templeton tax saver which had
given good average returns and also excess return compared to government bonds.
The researcher had also suggested that the investor should look into expense
ratio before investing into any scheme, as it tell us about the fees charged by
mutual fund houses.
3.
OBJECTIVES
OF THE STUDY
·
To evaluate the performance of Equity
Linked Saving Schemes on the basis of returns.
·
To find out the risk involved in various
types of Equity Linked Saving Schemes by using Standard deviation & Beta.
·
To evaluate the performance of Equity
Linked Saving Schemes by using risk adjusted measures such as Sharpe ratio and Sortino
ratio.
4.
DATA
& RESEARCH METHODOLOGY
·
Data Collection-The
data was collected from secondary sources such as journals and from the website
of value research and money control.
·
Analytical Tools-Different
types of tools such as Standard Deviation, Hypothesis testing, Beta, Sharpe
ratio, Sortino ratio are used in finding out the risk and performance of the
funds.
5.
LIMITATIONS
OF THE STUDY
a) The
study has been restricted to top 10 ELSS.
b) The
period is restricted to 5 years.
5.1.1.
DATA ANALYSIS
5.1.1.1.
Risk involved in various types of Equity
Linked Saving Schemes by using Standard deviation & Beta.
Table I: Risk involved in various types of
Equity Linked Saving Schemes by using Standard deviation & Beta. (in percent)
|
Sr. No. |
ELSS Schemes |
Standard
Deviation |
Beta |
|
1. |
13.37 |
0.9 |
|
|
2. |
15.18 |
1.01 |
|
|
3. |
14.61 |
0.96 |
|
|
4. |
14.76 |
1 |
|
|
5. |
15.1 |
1 |
|
|
6. |
19.53 |
1.08 |
|
|
7. |
13.46 |
0.89 |
|
|
8. |
14.46 |
0.97 |
|
|
9. |
17.05 |
1.07 |
|
|
10. |
16.93 |
1.08 |
|
|
Category Average |
14.74 |
0.96 |
Source: Money Control (n.d.) and Value Research (n.d.)
Table no. I clearly show the risk involved in
various types of Equity Linked Saving Schemes by using Standard deviation &
Beta. Motilal Oswal Long Term Equity Fund Plan (G) has recorded
the highest standard deviation value that is 19.53 percent than the category average. It means that there is more risk
involved in Motilal Oswal Long Term Equity Fund plan (G) than
any other selected schemes. There is a risk of getting either more or less
returns. Bandhan
ELSS Tax Saver Fund Direct Plan (G) has the lowest standard
deviation of 13.37
percent. This will in turn give stable returns to the
investors.
With
respect to beta
(market risk), Motilal Oswal Long Term
Equity Fund Direct Plan (G)
and Quant ELSS Tax Saver Fund
Direct Plan (G) have recorded the highest beta value of 1.08. It means that these funds carry
higher market risk than the category average of 0.96. In contrast, HDFC ELSS Tax Saver Fund
Direct Plan (G) has the lowest beta of 0.89, indicating lower market risk.
6.2. Returns generated in
selected Equity
Linked Saving Schemes
Table II: Returns generated in selected Equity
Linked Saving Schemes (in
percent)
|
Sr. No. |
ELSS Schemes |
1 yr |
3 yrs |
5 yrs |
|
1. |
Bandhan
ELSS Tax Saver Fund direct Plan (G) |
5.54 |
16.37 |
16.43 |
|
2. |
DSP
ELSS Tax Saver Fund direct Plan (G) |
3.21 |
20.7 |
17.61 |
|
3. |
Kotak
ELSS Tax Saver Fund direct Plan (G) |
3.11 |
16.15 |
15.58 |
|
4. |
Mirae
Asset Tax Saver Fund direct Plan (G) |
5.76 |
17.53 |
15.37 |
|
5. |
SBI
Long Term Equity Fund direct Plan (G) |
3.96 |
22.13 |
19.2 |
|
6. |
Motilal
Oswal Long Term Equity direct Plan (G) |
12.78 |
26.78 |
21.28 |
|
7. |
HDFC
ELSS Tax Saver Fund direct Plan (G) |
-0.21 |
19.65 |
19.59 |
|
8. |
Nippon
India ELSS Tax Saver Fund direct Plan
(G) |
7.27 |
19.82 |
17.14 |
|
9. |
Bank
of India Tax Advantage Fund direct
Plan (G) |
9.74 |
19.73 |
17.22 |
|
10. |
Quant
ELSS Tax Saver Fund direct Plan (G) |
10.62 |
19.92 |
19.76 |
|
Category Average |
3.79 |
17.07 |
15.52 |
Source: Money Control (n.d.)
and Value Research (n.d.)
Figure 1: Annualized Percentage Returns for the last
one year
Figure no. 1 shows the returns for the last 1 year
ranges from -0.21 to 12.78 percent. Motilal Oswal Long Term Equity fund has given
the highest return i.e 12.78 percent. This fund has outperformed benchmark
index. On
the other hand, HDFC ELSS Tax Saver Fund has given a very low return of -0.21%. Besides this, DSP ELSS Tax Saver Fund and Kotak
ELSS Tax Saver Fund also remained below 4%, performing close to
or below the category average.
Figure 2: Annualized Percentage Returns for the last
three years
Figure no. 2 shows the compounded annualized
percentage returns for the last three years ranges from 16.15 percent to 26.78
percent. The highest return of 26.78 percent is given by Motilal Oswal Long
Term Equity Fund whereas Kotak ELSS Tax Saver Fund has given the lowest return of
16.15 percent. All the selected funds have outperformed the benchmark category
average.
Figure 3: Percentage returns for the last five years
Figure no. 3 shows the compounded annualized
percentage returns for the last five years ranges from 15.37 to 21.28 percent. Motilal
Oswal Long Term Equity Fund has given the highest return of 21.28 percent for
the last five years which is then followed by HDFC ELSS tax saver and Quant
ELSS tax saver with 19.59 and 19.76 percent respectively. On the other hand, Mirae
Asset Tax saver fund has given the lowest return of 15.37 percent for the last
five years.
6.3. Performance of Equity Linked Saving Schemes by
using risk adjusted measures
Table III: Performance of Equity Linked Saving
Schemes by using risk adjusted measures
|
Sr. No. |
ELSS FUND |
Sharpe ratio |
Sortino ratio |
|
1. |
Bandhan
ELSS Tax Saver Fund direct Plan (G) |
0.51 |
0.71 |
|
2. |
DSP
ELSS Tax Saver Fund direct Plan (G) |
0.69 |
1.02 |
|
3. |
Kotak
ELSS Tax Saver Fund direct Plan (G) |
0.46 |
0.62 |
|
4. |
Mirae
Asset Tax Saver Fund direct Plan (G) |
0.54 |
0.76 |
|
5. |
SBI
Long Term Equity Fund direct Plan (G) |
0.81 |
1.22 |
|
6. |
Motilal
Oswal Long Term Equity Fund direct
Plan (G) |
0.69 |
1.01 |
|
7. |
HDFC
ELSS Tax Saver Fund direct Plan (G) |
0.77 |
1.13 |
|
8. |
Nippon
India ELSS Tax Saver Fund direct Plan
(G) |
0.64 |
0.96 |
|
9. |
Bank
of India Tax Advantage Fund direct
Plan (G) |
0.58 |
0.88 |
|
10. |
Quant
ELSS Tax Saver Fund direct Plan (G) |
0.54 |
0.82 |
|
Category
Average |
0.46 |
0.66 |
Source: Money Control(n.d.) and Value Research (n.d.)
SHARPE RATIO:-The Table no. III reveals that the
sharpe ratio for 10 ELSS Schemes ranges from 0.73 to 1.27. SBI
Long Term Equity Fund has recorded the
highest Sharpe ratio i.e. 0.81 followed by HDFC ELSS Tax Saver Fund i.e. 0.77. On the other hand, Kotak
ELSS Tax Saver Fund & Bandhan ELSS Tax Saver Fund has given the least Sharpe ratio. Higher the
Sharpe ratio higher is the performance of the schemes & higher risk
adjusted performance.
SORTINO
RATIO: - From the table, SBI Long Term Equity
Fund is the best because it has the highest Sortino ratio (1.22).
This means it gives good returns and avoids losses better than others. Kotak
ELSS Fund has the lowest Sortino ratio (0.62), which
means it is not as good in avoiding losses compared to others.
7.
FINDINGS
7. 1.To evaluate the performance of Equity Linked
Saving Schemes on the basis of returns.
•
Most of the selected ELSS schemes have
given good performance for the last 1 year, 3 years and 5 years as compared to
the benchmark standard.
•
Motilal Oswal Long Term Equity fund has given the
highest return for the last 1 year, 3 years and 5 years.
•
On the other hand, Axis long term equity
fund has given the least return for the last one year, whereas ICICI prudential
has given the least return for the last 3 and 5 years.
7.2. To find out the risk involved in various types
of Equity Linked Saving Schemes by using Standard deviation & Beta.
•
Motilal Oswal Long Term Equity Fund Plan (G) has
recorded the highest standard deviation value that is 19.53 percent than the category average. It means that there is more risk
involved in Motilal Oswal Long Term Equity Fund plan (G) than
any other selected schemes.
•
Bandhan ELSS Tax Saver Fund
Direct Plan (G) has the
lowest standard deviation of 13.37 percent. This will
in turn give stable returns to the investors.
•
With respect to beta
(market risk), Motilal Oswal Long Term
Equity Fund Direct Plan (G)
and Quant ELSS Tax Saver Fund
Direct Plan (G) have recorded the highest beta value of 1.08.
7.3. To evaluate the performance of Equity Linked
Saving Schemes by using risk adjusted measures such as Sharpe ratio and Sortino
ratio.
a)
Sharpe ratio- SBI Long Term Equity Fund has recorded the highest Sharpe ratio i.e.
0.81 followed by HDFC ELSS Tax Saver Fund i.e. 0.77. On the other hand, Kotak ELSS Tax Saver Fund & Bandhan ELSS Tax Saver Fund has given the least Sharpe ratio.
b)
SORTINO RATIO: - SBI Long Term Equity Fund has the highest Sortino ratio (1.22). Kotak ELSS Fund
has the lowest Sortino ratio (0.62), which means it is not as good
in avoiding losses compared to others.
8.
CONCLUSION
The
conclusion drawn from this study reveals that the most of the selected ELSS
schemes have given good performance for the last 1 year, 3 years and 5 years.
It is also found that some of the schemes have given the good results with
respect to their risk adjusted measures like Sharpe ratio and SORTINO ratio. Motilal Oswal Long Term
Equity Fund has given the highest standard deviation value i.e. 22.45% than any
other selected ELSS schemes. The results showed the positive relationship
between risk and return involved in ELSS schemes.
ELSS
schemes have a huge possibility to earn good returns in future as it is linked
to the market. It is advisable to go for ELSS schemes than any other tax saving
instruments since it is having the shortest lock-in period of 3 years.
9. RECOMMENDATIONS
·
The mutual fund asset management companies
should conduct awareness programs for the investors so that they are aware
about the dual benefits of tax saving and capital appreciation in ELSS schemes
·
The government should take more action to
promote the ELSS schemes amongst the investors.
·
Investors should invest in mutual fund
schemes through online platforms since it is very convenient and time saving.
·
Investors who are looking out for wealth
plus tax saving should opt for ELSS schemes.
10. REFERENCES
·
Lilly J. &Anusuya D. (2014).
An Empirical Study of Performance Evaluation of Selected ELSS Mutual Fund
Schemes.International Journal of
Scientific Research, 3(7):67-69.
·
Pathak R. (2018). A Study on Performance
Evaluation of ELSS Mutual Funds with special reference to growth funds. Journal of Emerging Technologies and
Innovative Research (JETIR), 5(5): 312-320.
·
MoneyControl. (n.d.). http://
www.moneycontrol.com.
·
Value Research. (n.d.). http://www.valueresearchonline.com.
·
All you need to know before investing in Mutual Funds. (n.d.). Retrieved from https://www.icicipruamc.com/learn-about-mutual-funds/courses/basics-of-mutual-fund/basic-concepts-related-to-mutual-funds
·
Basic Terms & Concepts of Mutual Funds. (n.d.).
Retrieved from https://www.kotaksecurities.com/ksweb/mutual-funds/mutual-fund-terms-and-concepts
·
Kapoor M. (2021). Equity Mutual Funds See Outflows For
Seventh Straight Month. https://www.bloombergquint.com/mutual-funds/equity-mutual-funds-see-outflows-for- seventh-straight-month
·
Lump Sum or SIP–Which
Will Give You Better Returns? (n.d.).Retrieved fromhttps: //www.paisabazaar.com/mutual-funds/lump-sum-vs-sip-better-mode-mutual- fund-investment/
·
NSE-Mutual Fund Platform. (n.d.). Retrieved
from https://www.nsenmf.com/Html/MFSProduct.aspx
·
What Are The Advantages And Benefits Of Mutual Funds
In India?(2020, Dec. 21).Retrieved from
https://scripbox.com/mf/advantages-of-mutual-funds/
·
What is a Mutual Fund? (n.d.). Retrieved from https://www.franklintempleton.com/investor/tools-and-resources/investor- education/what-is-a-mutual-fund
·
What is ELSS: Benefits, Taxation, Investment Guide
&Returns? (n.d.). Retrieved from https://www.paisabazaar.com/mutual-funds/what-is-elss/
