Jagoinvestor

January 2, 2009

How to choose Mutual Funds for tax saving purpose

95% of the salaried people are rushing to invest in tax saving (India). 5% of smart people have already done it (like me). The biggest rush I know must be still for LIC policies and PPF because very fewer people in India invest in Mutual funds still.

How to choose mutual funds

In my earlier posts, I have told which two mutual funds are the best candidate for investing now. They are SBI Magnum tax gain and Sundaram BNP Paribas Taxsaver

Both of these mutual funds are long term consistent performers and come from very respected and best AMC’s in India. Both of these have always been one of the best in the category.

But time changes, situation changes :), We can analyze some numbers and see what are the future prospects for these two mutual funds in comparison to each other. We will see on what basis we can conclude that. Please read the following conversation with my friend. It should give you some idea about how to choose mutual funds and why one could be possible is better than others.

Robert: Hey Manish, need some suggestion from you.

Manish: Hi Robert, what’s up … how is life these days?

Manish: How is a job going on?

Robert: Nothing yaar, I am just busy with my tax savings, have to submit the documents ASAP, so need to invest now, I am thinking of investing in an ELSS, Any suggestions?

Manish: Hmm… See, There are two good funds I think you can invest in, SBI Magnum tax gain and Sundaram BNP Paribas Taxsaver. These are the 5 star rated funds from valueresearchonline.com. You can consider those. But if you only want to invest in one ELSS, I would say go with Sundaram.

Robert: Hmm. Can you give me how you did this analysis and why are you saying that Sundaram looks better than SBI at this moment? I thought if a mutual fund has been long term consistent performer and our time horizon is more than 3-5 years, We can invest in any good funds.

Manish: That is true, I am not saying that SBI is bad and Sundaram is the best, we are trying to see why Sundaram is a better choice for now. We will see the numbers and some charts, and we can look that Sundaram is doing much better than SBI for quite some time.

That gives us a good estimation of which one is good for investing now. So, this requires some long-duration talk, I will have to tell you the details, are you ready?

Robert: ok

Manish: So, Let me first tell you that Since Inception returns for SBI has been 16.67% and for Sundaram its 19.35%, Which is highly respectful .. Let us also look at the following chart of NAV of both mutual funds for last 3 years.

Green: Sundaram
Red: SBI
Blue: Sensex

Manish: You can see that in the last 3 years, Sundaram has outperformed SBI Magnum and also was less volatile than SBI, when it comes to being consistent with Sensex. Also, we must see the last year charts of these two in isolation.

Manish: You can see that Sundaram has taken over SBI around Jun 2008 and has performed better than SBI. You must keep in mind that NAV and index values have been rebased to 100, for comparison purposes only.

Robert: Hmm.. that is fine, I understood that we have some charts which try to prove the point, But there must be other numbers also which favors Sundaram over SBI.

Manish: Yes, let me tell you some things which you can use for comparison purposes.

1. Sharpe Ratio:

Generally, people judge mutual funds performance by the returns only, whereas the better parameter is Return with respect to the risk taken. The Sharpe Ratio of a fund measures whether the returns that a fund delivered were commensurate with the kind of volatility it exhibited.

This ratio looks at both, returns and risk, and delivers a single measure that is proportional to the risk-adjusted returns.

So, the Sharpe ratio is noting but risk-adjusted returns, So the higher Sharpe Ratio is better. Currently, in the Mutual fund’s industry, Sundaram Tax saver and Canera Rebecco mutual funds have the highest Sharpe ratio of 15. SBI has 0.0.

2. Alpha Ratio:

This is a very important ratio in mutual funds. Alpha is a measure of an investment’s performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index.

The excess return of the investment relative to the return of the benchmark index is its alpha.

Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio’s return. A positive alpha of 1 means the fund has outperformed its benchmark index by 1%.

Correspondingly, a similar negative alpha would indicate an under-performance of 1%. For investors, the more positive an alpha is, the better it is.

Alpha for Sundaram: 3.35
Alpha for SBI Magnum: -1.18 !! (Bad)

3. R-Squared:

R-Squared is a statistical measure that represents the percentage of a fund portfolio’s or security’s movements that can be explained by movements in a benchmark index.

Higher the R-squared Value, closer the mutual fund to the index, what it means is that it will behave like Index funds up to that percentage, which means what if a mutual fund has r-square value of 100, its nothing but an index fund, then why to buy the mutual fund and pay high managing fees, A mutual fund should have a balance in R-square it should not be more than 90 and less than 80.

A mutual fund with less than 80 R-square shows that they have more tendency to be volatile and be close to the index benchmark. forbes.com says: Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being “closet” index funds.

In these cases, why pay the higher fees for so-called “professional management” when you can get the same or better results from an index fund.

R-squared for,
SBI Magnum: 94
Sundaram: 87

Read more about the ratios at :

https://www.investopedia.com/articles/mutualfund/112002.asp

Robert: Great !! those ratios are really important parameters while judging the mutual funds. Btw, I understood these things. Any thing regarding holdings?

Manish: Definitely, Ratios are important, but we should also look at simple things like its holdings in different types of companies. See below –

Sundaram Portfolio

[su_table responsive=”yes”]

           Market Capitalization              % of Portfolio
            Giant               56.17
            Large               17.10
            Mid               24.88
            Small               1.85
            Tiny                    —

[/su_table]

SBI Magnum

[su_table responsive=”yes”]

           Market Capitalization              % of Portfolio
            Giant               46.07
            Large               21.48
            Mid               25.52
            Small               6.91
            Tiny               0.01

[/su_table]

If you compare the investments by Sundaram, it has a high concentration in Giant companies and has avoided investments in Small and Tiny Companies, which helps in avoiding Risk (also returns can be affected, but more important is managing risk).

Also in the future when Markets improve and start rising, front line stocks (big companies) will be the first to move up.

Robert: Any other small things to consider?

Manish: Other things you should see are

Expense Ratio (lower the better) : Sundaram : 2,.24 , SBI : 2.5
Market Turnover
PE Ratio: Lesser is better
PB Ratio: Lesser is better, SBI is better in this Market Capitalization There are many other,

Robert: That is fine, but I can see that SBI is ranked 1st when you consider 5 yrs return and Sundaram is 2nd, I saw it on Value research online site.

Manish: True, But did you see its 3 yr Rank also? Its 5th !! and did you see 1 yr rank: its 12th for SBI Where as Sundaram is 2nd in 5 yrs, 1st in 3 yrs and 2nd in 1 yrs return category, which gives an indication that Sundaram is taking over as one of the best funds available over SBI slowly.

Robert: Hmm.. that makes sense, Great !! I would really consider these points, this helped a lot. Manish: My Pleasure !! But please understand that there is no guarantee that Sundaram will outperform SBI next year or from now on. There is just a high possibility for it, because of our analysis.

Question: Guys (and gals) … Do you know who is Robert and Manish 🙂 Ans: Both are Me … :), I just created this talk to present the article and learning in a different way and to make it practical and enjoyable .. I hope you all liked it.

Note: Please note that the views and analysis are personal, there may be some error, if someone finds any please, let me know. I will correct it. But I am sure there is no mistake or error in data.

Source: valueresearchonline.com and forbes.com

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109 Comments
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Neeraj
Neeraj
7 years ago

Dear manish I have invested in following funds 1. Franklin high growth company fund growth – 1000
2.dsp black Rock equity regular fund (G) – 1000
3. Icici prud value discovery fund (G) – 2000
I want to invest 3000 more which MF will be good

Neeraj
Neeraj
Reply to  Neeraj
7 years ago

My time frame is 10-15 yrs

ChetanKumar
ChetanKumar
7 years ago

Hi Manish, thanks a ton for sharing your knowledge. I’m 37 years, married with two children (8yrs and 5yrs). I earn close to 1L/month. I read your post on how to invest and would like to start investing a minimum of 20% of my take home salary.

I have a goal in mind and want to invest for 10-15 years. I review the research on VRO. Please guide me on how to choose MFs.

Thanks for you time. Regards, Chetan

Deepak
Deepak
8 years ago

Manish, u r really helping us to keep on investing , thanks.
I have already invested in mirae asset opportunity and motilal Oswal most focused 35.
I still want to invest 1000 rs in 3 more funds for say more 10 yrs pls suggest, good funds.

vijay
vijay
8 years ago

very useful article sir.
sir i want to know how purchase mutual fund. is it necessary to purchase MF via agent.

Sushil
Sushil
9 years ago

Hi Manish,

I am 27yrs old, 1st time investor.
I choose below MF for my Long Term(10 years) SIP based on Standard Deviation,Sharpe Ratio,Alpha,Beta,
Expense Ratio,Turnover ratio and my risk capacity.

Can you suggest if below funds are okay or need some changes.

Tax Saving
1) Axis Long Term Equity Fund-Direct(G)-500/-
2) Reliance Tax Saver-Direct(G)-500/-

Large cap Equity
3)ICICI Prudential Focused Bluechip Equity Fund-Direct(G)-1000/-

Mid&Small cap Equity
4)ICICI Prudential Value Discovery Fund-Direct(G)-1000/-

amit
amit
Reply to  Sushil
9 years ago

Hi Sushil, Bluechip equity fund with ICICI is a great option considering the kind of investment you are looking for . You can also check http://www.icicipruamc.com/equity-funds/ICICI-Prudential-Tax-Plan.aspx for more information.

Sushil
Sushil
Reply to  Jagoinvestor
9 years ago

Thanks Manish and Amit,

I have started my Mutual fund SIP investment in below funds…

Tax Saving
1) Axis Long Term Equity Fund-Direct(G)-1000/-
Large cap Equity
2)ICICI Prudential Focused Bluechip Equity Fund-Direct(G)-1000/-
Mid&Small cap Equity
3)ICICI Prudential Value Discovery Fund-Direct(G)-1000/-
4)Balanced Fund
HDFC Balanced Fund – Direct(G)-1000/-

Koushik Das
Koushik Das
9 years ago

Hi Manish,
I am planning to do sip of 20K /month in for next 5-7 years.
I am planning for equal distribution of 4k/month for the following fund.

Tata Balanced fund
ICICI prudential balanced advantage fund
UTI Opportunities Fund
Quantum Long term equity
HDFC Mid cap

I am a moderately aggressive investor.
Please suggest accordingly,
Thanks,
Koushik Das

Dinesh
Dinesh
10 years ago

Dear Manish,
Presently I am analysing few MFs as per the points in this article. But I am unable to get the 3 year and 1 year charts for comparison. Kindly guide me regarding how to get these charts and how to rebase them to 100. If any website is providing the same, then please let me know.
Thanks and regards,
Dinesh

Chetan Ambi
Chetan Ambi
10 years ago

Manish,

Brilliant article. Though I have heard n seen sharp ratio, alpha ratio, r-squared in VRO etc I never understood their meaning. This article really helped me. Tnx a lot !! Btw VRO is now revamped and I dont see these ratios on the site. Or Am i missing something?

Raj
Raj
10 years ago

Hi Manish,

I have recently invested in ICICI Pru Balanced fund for 3 years with monthly SIP of 2000/-. What would be the other best investment alternatives/MF’s for another 2-3K/month ?

Thanks for your response!

Balaji
Balaji
11 years ago

Manish, great Blog, I am planning to start my MF investments through SIP in below. All are targeted for a Three year period. My intention is to invest in Low risk funds.
1. HDFC Taxsaver – Growth (500 Rs/-)
2. ICICI Prudential Focused Bluechip Equity Fund – Retail – Growt (1000 Rs/-)
3. UTI Opportunities Fund – Growth (1000 Rs/-)
4. SBI Gold Fund – Growth (1000 Rs/-)
Could you please provide ur comments on the above……does this qualify as a decent portfolio ?

Balaji
Balaji
Reply to  Jagoinvestor
11 years ago

Thanks Manish,
I have a sharekhan demat account, I would like know if there will be any charges that will be levied by sharekhan on my SIP purchases?

pramod
pramod
12 years ago

Manish, firstly I want to congratulate the great work you keep doping here.
It would be great if you give some ideas as I am planning to start my MF investments thru SIP in below list considering thier history and feeling diversified..
1. HDFC 200 (2000 Rs/-)
2. IDFC Premier Equity Plan A (2000 Rs/-)
3. ICICI FMCG (2000 Rs/-)
4. Reliance Pharma Fund (2000 Rs/-)
5. UTI Gold ETF (2000 Rs/-)

can u just throw u r comments and I am sure your expertise will help me to choose the right ones any..

veera sekhar
veera sekhar
12 years ago

when all the people are invest their money into different mutual funds basing on the investors preference or funds manager preference how can you justify

Darshan
Darshan
12 years ago

very useful article manish.. gave a good idea on how to clear the clients questions..

manish
manish
12 years ago

hi,
i visited this site today only and too by chance. This site is very informative. I learnt a lot from the articles, which I read today. Just by chance, my name is also manish 😉

thanks,

VIGNESH
VIGNESH
12 years ago

I want to start investing in mutual fund.. am just a coll grad.I am now reading your blogs to get a clear idea before entering into mf. its so helpful. should i need to start with debt funds and then stp to equity??as i dont need any immediate amount can directly start in sip in any mf??I ll analyse the mf using the above parameters and then i ll decide.Thanks for the valuabe info..keep posting many of ths kind

Hem
Hem
13 years ago

Manish,

Could you write an article on how to choose a debt fund as there a lot of varieties? There a lot of blogs/websites on how to choose a equity fund but not debt fund. I want to use the the debt fund only for my portfolio rebalancing. I’ve been investing in BSL dynamic bond but I’m really not sure if this is a right a choice for this purpose. I just went by VRO’s suggestion.

Should one consider PPF+EPF+FD’s while managing the equity:debt ratio? Or is it just the equity funds:debt funds?

Thanks.

Hem
Hem
Reply to  Jagoinvestor
13 years ago

Hi Manish,

Thanks, I looked into archives but no one seems to suggest how to select a debt fund just for periodic portfolio re-balance?

Thanks,
Hem

Hem
Hem
Reply to  Jagoinvestor
13 years ago

Thanks so much, Manish.

Omkar
Omkar
13 years ago

Best language…very good presentation and interesting.. Thank you Manish.

Samir
Samir
13 years ago

Hi Manish,

Great site. It is on my bookmarks now, and going thru the archives is on my To-do list 🙂

Quick query please – Continuing my debt investments alongside, I’m looking to invest 30-40K per month into MF (medium risk appetite) thru SIPs…Maybe 6-8K in 5/6 MFs. Does it look too high / over commitment ?

Many thanks.
Samir

Ashish
Ashish
13 years ago

I wanted to invest in a Banking fund, since this is one sector, which is beaten as of now. I did research based on your article and video on MF selction. Reliance banking retail looks to be really having good Rank since last 7 years. But it’s Rsuqared ratio is 97, which means it is equivalent to index fund.
On the other hand Kotak PSU Bank ETF maintains these ratios, but doesn’t maintain ranking.

So how should I decide here? What other factors I should look for which would help me nail down one.

Diviay
Diviay
13 years ago

Hi Manish

I want to invest Rs. 1000 per month in Mutual Fund….. Please suggest a MF considering my investment period for more than 5 years.

Thanks

Rgds
Diviay