There is merit in increasing allocation to equities, especially in multi cap/large cap funds in a phased manner or in staying invested as the case may be for those with a medium to long-term view and in line with individual risk appetite, says Vinay Kulkarni, senior fund manager, equities, HDFC Asset Management Co. Ltd. Excerpts:
Why is it important to have tax-saving funds as a part of investment portfolios?
Tax saving funds, or equity linked savings schemes (ELSS), play a significant role in our investment portfolios as they also offer the benefit of wealth creation in addition to tax benefits under section 80C of the Income Tax Act, 1961.
An ELSS invests at least 80% of its corpus in equity and equity-related instruments, enabling investors to build wealth in the long run. Being an equity-oriented mutual fund, an ELSS offers investors a higher potential return, albeit at a higher risk.
Its three-year lock-in period (which is the least among all tax-saving investment options such as PPF, NSC and tax-saving FDs) also helps investors to tide over volatility, which is an inherent characteristic of equity investments. We, therefore, encourage investors to invest in ELSS with a long-term horizon in mind.
What is your market outlook for the upcoming fiscal?
Nifty 50 is trading near 16.6x earnings CY19 (expected) and 14.2x earnings CY20 (expected). These are reasonable multiples, especially in view of improving profit growth outlook. Markets thus hold promise over the medium to long-term in our opinion.
Adverse global events, rise in crude oil prices, sharp moderation in equity-oriented mutual fund flows and delays in NPA resolution under NCLT are the key risks in the near term.
In view of the above and expected recovery in earnings, there is merit in increasing allocation to equities, especially in multi cap/large cap funds in a phased manner or in staying invested as the case may be (for those with a medium to long-term view and in line with individual risk appetite).
Could you tell us about the performance of HDFC TaxSaver in the last three- and five-year periods?
HDFC TaxSaver has maintained a significant large cap exposure, averaging at approximately 77% of the portfolio for the last three years. Large cap stocks have largely under-performed mid and small cap stocks in the last five years. This has been mainly attributed to weak earnings growth among large caps. Nifty EPS grew at an annualised rate of only 3.5% in the last five years. However, we believe the outlook for large-cap stocks, going forward, is positive. This may be because earnings growth is likely to come back strongly. Nifty EPS is estimated to grow at an annualised rate of almost 18.7% (source: Kotak Institutional Equities) over financial years 2018-21. Large-caps, therefore, present an opportunity for generating returns, and we may continue to invest in large caps in the near future.
We have also maintained a diversified portfolio with exposure across sectors such as corporate and retail banking, oil and gas (both upstream and downstream), utilities, industrials and IT services.
How has the risk appetite of investors changed in the last few months?
FII/FPI flows have fallen in the current financial year so far (net outflows in equities of approximately ₹33,600 crore until February 27, 2019). However, improved understanding of equities as an asset class among retail investors has resulted in steady flows from them.
The monthly SIP (systemic investment plan) collections in mutual funds have stayed strong and grown from ₹6,690 crore in the month of April 2018, to ₹8,063 crore in the month of January 2019. Therefore, despite the recent volatility in equity markets, the risk appetite of retail investors has remained strong.
What are your views on Interim Budget 2019, given the tax rebate has increased to ₹5 lakh?
The tax rebate announced in the Interim Budget 2019 is a major step that may have a significant positive economic impact on the middle class. The increase in rebate may provide tax benefits to an estimated three crore middle class taxpayers. Additionally, with proper tax planning and investments under section 80C of the Income Tax Act, 1961, taxpayers may now be able to earn up to ₹6.50 lakh per annum without paying any income tax.
What kinds of investment do you recommend for your investors?
Normally, we suggest SIPs from the start of the financial year to our investors, as it can help with tax planning in advance.
SIP is a disciplined way of investing that helps in eliminating the need to time the markets by averaging the cost of investments over time. However, since we are now in the month of March and the financial year end is around the corner, lump sum investments should be considered in order to achieve the tax-saving goals for this financial year.
