PERFORMANCE EVALUATION OF ELSS

What benefits can an investor wish from any tax saving instrument? In a model world,
he may wish for highest returns possible, full safety of his money, 100% tax deduction under
Income Tax Act 1961 and no lock-in period. But that’s possible only in his hallucinations
because such an instrument in all the economies of the world combined does not exist. But
closest if anything which comes to this definition of a perfect tax saving option is the ELSS.
For amateur middle class and upper middle class people, nothing else could be superior than
putting their hard earned savings in an Equity Linked Saving Scheme (ELSS) that offers tax
saving as well as a possibility of higher return.

An ELSS is a type of a mutual fund and is quiet parallel to any other equity mutual
fund in many ways. An ELSS gives tax benefit but comes with a lock in period of 3 years.
The portfolio of any ELSS is a combination of range of asset categories including equity,
debt, gold and real estate. Initially a three year lock-in period may sound irrational to the
prospective investor. But then to be rational he should consider the fact that all investment
options under Section 80C have a lock-in period clause attached to them. In fact, ELSS has
the shortest lock-in period (see Table below).

Investment Alternatives Lock-in period

National Savings Certificates 5Years

Public Provident Fund 15 Years

Institutional Bonds e.g. those issued by IDBI 3 Years

Equity Linked Savings Schemes 3 Years

Source: http://www.allbankingsolutions.com/fin-section80c.htm

But despite this NSC, PPF and bonds are more trusted by the investors. Major
advantage of this three year lock in period is that it controls the withdrawal of money hence
allowing your investment to grow with the passage of time. And this is an unwritten rule that
long term investments in equities always yields increasing returns as compared to any other
investment instrument available. By compelling the investor to wait for three years, it makes
 Performance Evaluation of ELSS

him to take a long term vision of the market, which injects investing order to a definite
degree. The actual caliber of a portfolio in generating returns from equities can be realized
only if the money stays invested for at least a few years. Moreover if the fund manager knows
that the investment would not be withdrawn in the next three years he will be able to plan and
formulate a line of attack that will ultimately do good to the investor only. (Source:
http://www.financialexpress.com/news/929093/3)

Then a tax deduction for people in the higher tax brackets plus the elasticity to invest
miniature amounts via a Systematic Investment Plan (SIP) which acts as the icing on the cake
makes ELSS more suitable. It is like putting in a set sum every month for a year and then
getting tax breaks on it at the end of the financial year. For example: you invest ` 2000 every
month (` 24,000 p.a.) in an Equity Linked Saving Schemes (ELSS). The monthly saving
lightens the load of investing a huge amount at the end of the financial year. And since we
can invest up to ` 1, 00,000 it becomes more important to save in installments.

Above all if one invests in any ELSS, there will be two major legal bodies on
investor’s side to protect his interest; Association of Mutual Funds in India (AMFI) and
Securities and Exchange Board of India (SEBI).

The asset allocation is almost preset and is in harmony with SEBI guidelines and also
depending upon the tax incentives and liquidity. Money market instruments contribute the
minimum portion of the total amount invested in any ELSS. Maximum is the input of
equities, cumulative convertible preference shares and fully convertible debentures and a bit
of bonds of companies. This portion is around 80 - 90%. (Source:
http://tips.thinkrupee.com/articles/equity-linked-savings-scheme-elss.php). This bifurcation
shows an incline towards equities which has the maximum chances for providing first-rate
proceeds. Besides this allocation the choice of industry and company, mid-cap or large cap is
in the hands of the individual fund manager. A positively growing performance in the past
and a diversified portfolio spread across various sectors and companies are the two main
features which an investor should look for when short listing particular ELSS for putting in
his money. This is significant, as the lock-in means he cannot make a mid-way exit.

Among all investment avenues available under Income Tax Act 1961, ELSS has the
scope for highest returns. National Savings Certificates and Institutional Bonds give returns
at a flat percentage and nothing more than that. In contrast, ELSS being an equity based

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product can heighten returns way above any other fixed income instrument. These returns
could be in any form like dividend or appreciation in the NAV depending upon the option
chosen by the investor between dividend or growth. Hence by this we can conclude that risk
and return both are high in case of ELSS because higher returns come only at higher levels of
risk. But the very grounds that can push up returns of an ELSS can also pull them down. By
diverting investor’s money towards equities, the fund manager can only pay you returns
depending on the performance of the stock market. So if market is going through exhilarating
times, this will get reflected in the NAV also. On the contrary, if indexes are down, the NAV
will automatically decrease. Equity Linked Saving Scheme (ELSS) is a product with a high
risk-high return profile and is suitable for investors who are way under the retirement age.
People who have invested in fixed income instruments like PPF, NSC and institutional bonds
can deem fit investing in ELSS for a revolution, to increase their returns by adding the spark
of risk in their portfolio (Source: http://www.personalfn.com/knowledge-center/mutual-
funds/tutorials/11-10-03).

We work hard for our money but what we do not realize is that sometimes, our money
does not work hard enough for us unless we make it to and perhaps one of the reasons for this
is that we are not able to devote enough time to plan our savings. Moreover each passing day
tends to lend a new dimension to the world of finance only adding to the prevailing
complexities. One such dimension is ELSS which will be discussed in this chapter in detail.

This chapter is sub divided into the following sections:

9.1 Number of ELS Schemes.

9.2 AUM of ELS Schemes.
9.3 Percentage Contribution by ELSS.
9.4 Results and Discussion.
9.4.1 Average annual NAV.
9.4.2 Total Return.
9.4.3 Beta (β) of the Scheme.
9.4.4 R-Square of the Scheme.
9.4.5 Standard Deviation.
9.4.6 Sharpe’s Ratio.
9.4.7 Treynor’s Ratio

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 Performance Evaluation of ELSS

9.4.8 Compound Annual Growth Rate.

9.4.9 Risk Adjusted CAGR.
9.4.10 Expense Ratio.
9.4.11 Modigliani risk-adjusted performance.
9.4.12 Jensen's Performance Index.
9.4.13 Information ratio.
9.4.14 Statistical testing of significant differences.

9.5 Conclusion.

9.1 NUMBER OF EQUITY LINKED SAVING SCHEMES

For the analysis of the status of ELSS in the Indian mutual funds industry no. of ELSS
floating in the market should be brought to light. Table 9.1 and Fig. 9.1 reveals the growth of
Equity Linked Saving Schemes (ELSS) in terms of number of schemes floating in the market
as on 31st March of every year since 2001 up to 2010. Figures for both open – ended and
close – ended type have been given.

Table -9.1

ELSS in India in terms of no. of schemes (As on 31st March)

Year Open ended Close ended

Total Schemes
Schemes Schemes
2001 18 62 80
2002 18 45 63
2003 20 27 47
2004 19 24 43
2005 20 17 37
2006 26 11 37
2007 29 11 40
2008 30 12 42
2009 35 12 47
2010 36 12 48

Source- www.amfiindia.com

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 Performance Evaluation of ELSS

In 2001 number of close ended schemes were 44 more than the open ended schemes,
this was the highest ever gap between the two types. The total number of schemes was also at
its peak this year at 80 which kept on decreasing every year before 2007 when it rose to 40
from its previous Figure of 37. After this there has been a gradual increase except in case of
close ended schemes which has stayed stable may be because of the fact that longer lock - in
periods attached with them makes them less popular amongst the investors. Open ended
schemes has always seen an increase in their number except in the year 2004 when they
declined by just 1. In the last decade open ended schemes have seen a growth of 100%, while
the close ended schemes have seen a decline of 80%.

Figure – 9.1

ELSS in India in terms of no. of schemes

(As on 31st March)

9.2 AUM OF EQUITY LINKED SAVING SCHEMES

The total value of assets that a mutual fund administers for itself and its customers is
known as Assets Under Management or AUM. This very value clearly reflects the position of

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 Performance Evaluation of ELSS

that specific fund in the mutual fund industry as a whole. The amount of AUM is simple and
the most prominent factor to determine the success or failure of a single fund or an industry.
Table 9.2 and Figure 9.2 reveal the growth of ELSS in terms of their Assets Under
Management (AUM) as on 31st March of every year in the last decade.

Table -9.2

ELSS in India in terms of AUM (` Cr)

(As on 31st March)

Open
Year Close ended % of
ended Total
Schemes Total AUM
Schemes

2001 324 2199 2523 3

2002 418 1350 1768 2

2003 350 878 1228 1.5

2004 489 1180 1669 1

2005 708 1019 1727 1

2006 5091 1498 6589 3

2007 8398 1813 10211 3

2008 13327 2693 16020 3

2009 10570 1857 12427 3

2010 20911 3155 24066 4

Source- www.amfiindia.com

On the basis of Table 9.2, it can be said that both open ended as well as close ended
schemes have not shown any definite trend in their progress in last 10 years in terms of
AUM. This makes their AUM as a very unpredictable factor which has no correlation with
the increase or decrease in the number of schemes offered in the market. Total AUM of close
- ended schemes has not shown any extreme changes in the period of study. Whereas on the
other hand in the year 2006 and 2010 AUM of open – ended schemes showed drastic

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 Performance Evaluation of ELSS

increases to ` 5091 crores and to ` 20911 crores respectively. Looking at the figures of total
AUM it can be said that ELSS have seen a tremendous increase from ` 2532 crores to `
24066 crores.

Figure -9.2

ELS Schemes in India in terms of AUM (` Cr)

(As on 31st March)

9.3 PERCENTAGE CONTRIBUTION

Fig. 9.3 below shows the contribution of all the ELS Schemes towards the total AUM
of the Indian mutual funds industry in percentage form. The Figures mentioned are on 31st
March of every starting from 2001 upto 2010.

The contribution of ELSS towards the pool of total AUM of the mutual funds industry
has always varied from 1% to 3% except for the year 2010 when it was 4% i.e. the highest
ever in the last decade. The least contribution was in the year 2004 and 2005 at only 1%.

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 Performance Evaluation of ELSS

Considering the variety of schemes available for the investors, 4% is a significant number
and taking in mind the advantages of ELSS it can be deduced that there is a lot of scope for
the 4% to increase

Figure - 9.3

ELSS as % of total AUM of Indian Mutual Fund Industry

(As on 31st March)

9.4 RESULTS AND DISCUSSION

A brief introduction to the characteristics of the selected ELS schemes for the study
have been given in Table 9.3. All the ELSS aims at providing investors the opportunity to
participate in the reasonable growth in the value of investments in equities & equity linked
securities, over a period of time, in addition to tax benefits. In addition to it one more
common feature of these schemes is that minimum investment required to enter them is `
500.

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 Performance Evaluation of ELSS

Table 9.3

Key features of the selected schemes

G = growth option D = dividend option

Date Of NAV on 1st April NAV on 31st March

Scheme Name Inception/ 2000 2010
Type D G D G

HDFC Tax Saver 31/03/1996

41.58 41.58 57.78 205.68
Open-Ended

ICICI Prud. Tax 09/07/1999

14.61 20.10 18.99 127.34
Plan Open-Ended

Reliance Tax Saver 22/09/2005

9.95* 9.95* 14.60 18.72
Open-Ended

SBI Magnum Tax 31/03/1993

52.69 52.69 39.40 57.80
Gain Open-Ended

UTI Equity Tax 15/11/1999 12.28 12.28 15.94 37.49

Saver Plan Open-Ended

*As on 22/09/2005: Source: www.mutualfundsindia.com

9.4.1 Average Annual NAV

The funds have been compared on the basis of their average annual NAVs and their
growth over and above the previous year values in Table 9.4. NAV of dividend option and
growth option of all the schemes have been mentioned separately. The percentage growth
rates in all the NAV, over and above the previous year’s average NAV are also given.

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 Performance Evaluation of ELSS

Table – 9.4

Comparative Table for Annual Average NAV of the schemes

G = growth option D = dividend option (% = % growth over the previous year NAV)

Year HDFC Tax Saver ICICI Prudential Tax Plan Reliance Tax Saver* SBI Magnum Tax Gain UTI Equity Tax Savings

G % D % G % D % G % D % G % D % G % D %

2000-01 18.20 18.12 13.11 9.54 25.51 25.51 11.23 11.23

2001-02 16.54 -9.12 14.79 -18.79 10.83 -17.39 7.90 -17.19 12.39 -51.43 12.39 -51.43 8.87 -21.02 8.87 -21.02

2002-03 18.66 12.82 14.82 0.20 12.45 14.96 9.08 14.94 12.57 1.45 12.57 1.45 10.03 13.08 10.03 13.08

2003-04 31.01 66.18 22.39 51.08 21.73 74.54 14.58 60.57 18.57 47.73 18.57 47.73 14.27 42.27 14.46 44.17

2004-05 50.59 63.14 30.48 36.13 34.75 59.92 15.99 9.67 27.75 49.43 27.75 49.43 16.39 14.86 16.77 15.98

2005-06 95.86 89.48 51.33 68.41 65.20 87.63 25.57 59.91 11.08 11.08 46.29 66.81 46.29 66.81 23.11 41.00 20.17 20.27

2006-07 132.51 38.23 62.90 22.54 86.70 32.98 26.28 2.78 12.97 17.06 12.87 16.16 47.90 3.48 47.90 3.48 28.50 23.32 17.14 -15.02

2007-08 168.80 27.39 70.57 12.19 100.81 16.27 22.40 -14.76 16.38 26.29 14.87 15.54 54.21 13.17 53.01 10.67 36.73 28.88 19.80 15.52

2008-09 120.47 -28.63 44.18 -37.40 74.09 -26.51 14.10 -37.05 11.66 -28.82 10.22 -31.27 39.22 -27.65 31.87 -39.88 27.01 -26.46 12.61 -36.31

2009-10 168.85 40.16 52.07 17.86 101.51 37.01 17.28 22.55 15.70 34.65 12.80 25.24 50.32 28.30 37.88 18.86 32.43 20.07 14.75 16.97

*Introduced on 22/09/2005

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 Performance Evaluation of ELSS

Table 9.4 depicts that the ELSS have seen a steady escalation in the last decade in
terms of their NAV except in the years 2001-02 and 2008-09 when a negative growth was
recorded. The worst effecting were the subprime crisis of the U.S in the year 2008 which
were caused due to excess lending provided by reputed American banks to people with low
or poor credit worthiness. Firms like Bear Sterns, Lehman Brothers, and Meryl Lynch had
gone broken and many others were finding it tremendously tricky to balance on their feet. In
order to strengthen their balance sheets, these banks wrapped up positions in developing
markets which led to a losing swing in markets like India. A simple case in point was the
intra day 1400 points fall on the BSE in January 2008 that was brought about by Citi Bank
unwinding its position in many front line stocks in India. In these testing times all the ELSS
gave negative growth in the range of -26.51% (UTI Equity Tax Savings growth option) upto -
39.88% (SBI Magnum Tax Gain dividend option). The highest average NAV in a year
recorded in the period of study was 168.85 by HDFC Tax Saver growth option in the year
2009-10. This scheme has also given highest growth of 89.48% in 2005-06. While the least
average NAV in a year was of 8.87 by UTI Equity Tax Savings and least growth rate of -
51.43% was by SBI Magnum Tax Gain in 2001-02. A fashion which comes to light after
studying the table is that initially when the fund is launched the NAV of its growth and
dividend option remains more or less closer but gradually huge differences between the two
values can be seen which is due to intensive ploughing back of profits by growth options
which leads to appreciation in the value of investments. Besides being almost at par in the
year 2000-01, private sector ELSSs have shown tremendous amplification in their average
NAVs till reaching the year 2009-10. In a nut shell it can be said that in terms of NAV,
private sector ELSSs are obvious champions including Reliance Tax Saver which regardless
of being a late entrant is giving almost equivalent growth rates at present to its competitors.

9.4.2 Total Return

Next parameter for comparing the chosen tax saver schemes is their return over the
period of study. The return values of S&P CNX 500 index has also been mentioned as a
benchmark for more effective interpretation of the results. In Table 9.5 total returns earned in
the last decade ending on 31st March 2010 by the chosen ELSS is mentioned.

A strong conclusion which can be derived from the return values is that public sector
sponsored mutual funds are nowhere near private sector mutual funds when it comes to
giving returns to their investors. ICICI Prudential Tax Plan growth option leads all other

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 Performance Evaluation of ELSS

ELSS, by earning exceptionally high return rate of 533.53%. In case of public sector
sponsored ELSS maximum return is recorded by UTI Equity Tax Savings growth option
(205.29%).

Table –9.5

Comparative Table for Total Return (%)

G – growth option D – dividend option

S&P
HDFC Tax ICICI Pru Reliance Tax SBI Magnum UTI Equity Tax
CNX
Saver Tax Plan Saver* Tax Gain Savings
500

G D G D G D G D G D
231.0
394.66 38.96 533.53 29.97 88.14 46.73 9.69 -25.22 205.29 29.80

*Introduced on 22/09/2005

In fact SBI Magnum Tax Gain dividend option is even showing a negative return of -
25.22% and its growth option shows the least return of 9.69%. Reliance Tax Saver growth
option is giving only double digit return unlike its other counterparts from private sector,
which is completely justified as it was a late entrant in the mutual funds industry of India.

9.4.3 Beta (β) of the Schemes

Beta is a measure of risk which, when applied to a fund provides functional statistical
information. It indicates a fund's precedent price volatility relative to a particular stock
market index.
Table – 9.6

Comparative Table for Beta (β)

G – growth option D – dividend option (As on 31st March 2010)

HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity Tax
Saver Plan Saver* Tax Gain Savings

G D G D G D G D G D

0.773 0.798 0.829 0.825 0.734 0.736 0.912 0.905 0.797 0.804

*Introduced on 22/09/2005

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 Performance Evaluation of ELSS

Table 9.6 reveals the Beta value of fund returns of the chosen ELSS as on 31 st March
2010 calculated on the basis of daily returns of the last ten years. The table illustrates that the
values are in the range of 0.734 (Reliance Tax Saver growth option) to 0.905 (SBI Magnum
Tax Gain dividend option) with an exception of SBI Magnum Tax Gain growth option
whose Beta value comes out to be 0.912 which shows that it is maximum in line with the
changes in the market. The fund which is least affected by the market risk is Reliance Tax
Saver. As regards this risk measure is concerned it can be concluded that public sector
sponsored ELS schemes are more risk prone towards the market fluctuation. Contrary to this
private sector mutual funds hold less risky portfolios. One more thing which is visible is that
except in case of SBI Magnum Tax Gain and ICICI Prudential dividend’s options of all other
ELSS have captured more of the changes in the market as compared to their counterpart
growth options.

9.4.4 R-Square of the Schemes

R-square measures a fund's movements against its particular benchmark index on a

scale. In Table 9.7 below R - square values of the selected ELSS has been given as on 31 st
March 2010 which have been calculate using the daily returns in the last ten years. Here r2
has been calculated between fund return and S&P CNX 500 index return.

Table –9.7

Comparative Table for R - Square

G – growth option D – dividend option (As on 31st March 2010)

ICICI
HDFC Tax Reliance Tax SBI Magnum UTI Equity
Prudential
Saver Saver* Tax Gain Tax Savings
Tax Plan

G D G D G D G D G D

0.399 0.365 0.542 0.407 0.570 0.535 0.349 0.332 0.501 0.352

*Introduced on 22/09/2005

The highest R-square was noted to be that of Reliance Tax Saver growth option with
the value of 0.570 which implies that 57% of the change in the NAV of this fund is due to the
fluctuations in the market. The fund which is most adequately diversified is found to be SBI
Magnum Tax Gain dividend option with an R-square of 0.332 for dividend option and 0.345
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 Performance Evaluation of ELSS

for growth option. In case of ICICI Prudential Tax Plan growth option it can be accomplished
that market is a good factor to explain the changes in the performance of the fund as the R-
square value is significantly high at 0.542. In private sector schemes the range of R-square is
from 0.570 to 0.365. Whereas in case of public sector sponsored schemes the range is from
0.501 to 0.332. This clearly shows that market condition is more a descriptive variable for the
NAVs of private sector ELSS. In a nutshell it can be said that portfolios of public sector
sponsored ELSS are effectively distributed. One more thing which comes to light is that R-
square of every fund is high in case of its growth option as compared to its dividend option.

9.4.5 Standard Deviation

Standard deviation is almost certainly used more often than any other measure to
estimate a fund's risk. It simply quantifies how much a fund’s return, varies around its mean.
In Table 9.8 standard deviations of fund returns of all the chosen ELSS are given as on 31st
March 2010 which have been calculated using the daily return values of the schemes. For
better analysis of the data standard deviation of the benchmark index i.e. S&P CNX 500 has
also been mentioned.

Table –9.8

Comparative Table for Standard Deviation (%)

G – growth option D – dividend option (As on 31st March 2010)

S&P ICICI
HDFC Tax Reliance Tax SBI Magnum UTI Equity
CNX Prudential
Saver Saver* Tax Gain Tax Savings
500 Tax Plan

G D G D G D G D G D
1.51
1.84 1.99 1.70 1.95 1.67 1.73 2.33 2.37 1.70 2.04

*Introduced on 22/09/2005

In our study the highest Standard Deviation (S.D) is that of SBI Magnum Tax Gain
scheme (2.33% for growth option and 2.37% for dividend option). This means that this fund
gives the most unpredictable returns. The other public sector sponsored fund, UTI Equity Tax
Savings also has S.D on a higher side. Looking at S.D values it can be said that all the private
sector funds under study are giving returns more or less in close proximity to their average

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 Performance Evaluation of ELSS

returns. By this it can be concluded that public sector sponsored ELSS are more volatile and
random as compared to private sector ELSS in terms of their returns. S.D of Reliance Tax
Saver growth option is the nearest to S.D of the S&P CNX 500 index which is also the
minimum.

9.4.6 Sharpe’s Ratio

This model evaluates funds on the basis of reward per unit of total risk. A high and
positive Sharpe’s ratio is an indication of a finer risk adjusted performance. Here the Sharpe’s
Ratios have been calculated on the basis of Standard Deviation of the fund in the last decade
and 91 day Treasury Bill return (risk free rate of return). In Table 9.9 Sharpe’s ratios of all
the selected ELSS as on 31st March 2010 are given. For more effective analysis of the data
Sharpe’s ratio of the S&P CNX 500 index has also been mentioned as the benchmark.

Table –9.9

Comparative Table for Sharpe’s Ratio

G – growth option D – dividend option (As on 31st March 2010)

S&P ICICI
CNX HDFC Tax Prudential Reliance Tax SBI Magnum UTI Equity
500 Saver Tax Plan Saver* Tax Gain Tax Savings

G D G D G D G D G D
-4.23
-3.44 -3.22 -3.73 -3.28 -3.80 -3.68 -2.75 -2.71 -3.75 -3.13

*Introduced on 22/09/2005

In the above table it is clearly visible that all the schemes have posted negative values
including the benchmark index. This proves the point that satisfactory return against the level
of total risk attached has not been earned. So now the basic point for evaluation of the data
will be that lesser negative ratio would mean a better performance. All the funds have atleast
given better outcomes than the market. SBI Magnum Tax Gain fund can be adjudged as the
best amongst equals being the only fund giving Sharpe’s ratio in the range of -2. Amongst the
private players all the funds are showing above -3 Sharpe’s ratio and the worst of them is
Reliance Tax Saver Fund growth option with the most negative value of -3.80.

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 Performance Evaluation of ELSS

So it can be concluded that here public sector sponsored Equity Linked Saving
Schemes (ELSS) have managed to provide superior domino effects as compared to their
challenger private sector Equity Linked Saving Schemes (ELSS).

9.4.7 Treynor’s Ratio

Treynor’s Ratios have been calculated on the basis of Beta of the fund in the last
decade and 91 day Treasury Bill return as the risk free rate of return. For more useful analysis
of the data Treynor’s ratio of the S&P CNX 500 index has also been mentioned as the
benchmark. In Table 9.10 Treynor’s ratios of all the selected ELSS as on 31 st March 2010 are
given .

Table –9.10

Comparative Table for Treynor’s Ratio

G – growth option D – dividend option (As on 31st March 2010)

S&P HDFC Tax ICICI Pru Reliance Tax SBI Magnum UTI Equity
CNX Saver Tax Plan Saver* Tax Gain Tax Savings
500

G D G D G D G D G D
-7.90
-8.20 -8.01 -7.68 -7.76 -8.66 -8.67 -7.02 -7.08 -7.99 -7.96

*Introduced on 22/09/2005

In the study all the values of Treynor’s ratio for all the schemes have come out to be
negative in the range or -7.02 (SBI Magnum Tax Gain growth option) to -8.67 (Reliance Tax
Saver dividend option). This means they were unable to give sufficient returns at the level of
risk taken. ICICI Prudential Tax Plan and SBI Magnum Tax Gain have outperformed the
market in terms of Treynor’s ratio. Higher negative values would mean depressing
performances. Therefore it can be deduced that HDFC Tax Saver, and UTI Equity Tax
Savings have given poor results and the worst hit fund is Reliance Tax Saver Fund dividend
option (-8.67) with its Treynor’s ratio crossing the second highest mark of -8.66 recorded by
its growth option.

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 Performance Evaluation of ELSS

So precisely it can be said that in terms of protecting investor’s money from the
market fluctuations public sector sponsored Equity Linked Saving Schemes (ELSS) are better
off than private sector Equity Linked Saving Schemes (ELSS).

9.4.8 Compound Annual Growth Rate

Compound Annual Growth Rate is the year-over-year growth rate of an investment is

for a specified period of time. The CAGR is an improved version of the total percentage
growth rate. Table 9.11 shows the Compound Annual Growth Rate (CAGR) of the selected
ELS Scheme calculated on the basis of average annual return of the year 2000-2001 and
2009-2010.

Table – 9.11

Comparative Table for CAGR (%)

G – growth option D – dividend option (As on 31st March 2010)

S&P SBI UTI Equity

HDFC Tax ICICI Pru Reliance
CNX Magnum Tax
Saver Tax Plan Tax Saver*
500 Tax Gain Savings

G D G D G D G D G D

CAGR 22.91 35.35 18.91 33.05 10.28 6.08 0.58 16.24 13.36 17.24 5.61

t- 7.39 8.67 4.95 7.82 2.73 1.09 0.10 3.82 2.89 7.18 2.06
values
*Introduced on 22/09/2005

Table 9.11 shows that Reliance Tax Saver dividend option is giving least CAGR of
0.58% which is very much different from the least CAGR of a public sector sponsored fund
(UTI Equity Tax Savings dividend option at 5.61%). HDFC Tax Saver growth option being
the exceptionally good performer has given a double digit positive CAGR (35.20%) i.e. it can
be assumed that it has grown with every compounding cycle. This growth is even higher than
the growth experienced by our benchmark index (22.91%). The best CAGR value by a public
sector sponsored ELSS is of UTI Equity Tax Savings growth option at 17.24%. Here the
level of significance has been taken to 0.05 and accordingly calculated values have been
compared with tabulated values (1.833 for n – 1 = 9 years). All the calculated values divided
by 100 are coming out to be less than tabulated values. Doing this the results show that null

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hypothesis is rejected in case of all the schemes under consideration. Hence it can be
concluded that average annual returns of all the schemes for all the 10 years of the study have
varied significantly. Hence it can be concluded that in terms of CAGR of Equity Linked
Saving Schemes (ELSS) private sector has outshined.

9.4.9 Risk Adjusted CAGR

Higher is the Risk Adjusted CAGR of a mutual fund better is its capability to take
more risks and still give returns. Table 9.12 shows the Risk Adjusted Compound Annual
Growth Rate of the selected tax saver schemes calculated on the basis of the daily NAV
starting from 1st April 2000 upto 31st March 2010. The same has been calculated for the
benchmark index i.e. S&P CNX 500 also.

Table -9.12

Comparative Table for Risk Adjusted CAGR (%)

G – growth option D – dividend option (As on 31st March 2010)

S&P HDFC Tax ICICI Pru Reliance Tax SBI Magnum UTI Equity
CNX Saver Tax Plan Saver* Tax Gain Tax Savings
500

G D G D G D G D G D
16.04
21.92 12.67 20.16 6.89 4.38 0.43 10.07 8.02 13.10 4.21

*Introduced on 22/09/2005

The Risk Adjusted CAGR of the S&P CNX 500 is 16.04% , and when compared
with the benchmark only HDFC Tax Saver growth option (21.92%) and ICICI
Prudential Tax Plan growth options (20.16%) have given better results. Both are private
sector sponsored mutual funds. This shows that despite being at higher levels of risks they
have made the investments of their unit-holders grow satisfactorily. The worst performer here
can be adjudged as the Reliance Tax Saver dividend option with a Risk Adjusted CAGR of
just 0.43%. From the public sector sponsored the maximum Risk Adjusted CAGR achieved is
by UTI Equity Tax Savings growth option (13.10%). Therefore it can be accomplished that
private sector is more able to take risks and still make the money grow.

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9.4.10 Expense Ratio

Expenses are the decisive measure of how superior the returns of a mutual fund will
be. In the investing world, usually we don’t get what we pay for. In fact there's a lot of
indication to suggest the opposite. The more we pay for a mutual fund scheme, the less we
get in return. In Table 9.13 average Expense Ratios of the selected tax saver schemes have
been given on the basis of the data for the period starting from 1 st April 2000 upto 31st March
2010. The maximum and the minimum expense ratio during the study period have also been
mentioned for better analysis of the results.

Table –9.13

Comparative Table for Expense Ratios (%)

UTI
HDFC Tax ICICI Pru Reliance SBI Magnum
SCHEME Equity Tax
Saver Tax Plan Tax Saver* Tax Gain
NAME Savings

Average 2.20 2.29 2.29 2.08 2.10

Maximum 2.25 2.36 2.50 2.48 2.25

Minimum 2.13 2.18 1.86 1.79 1.87

www.mutualfundsindia.com

SBI Magnum has been the most misers during the study period with an expense ratio
of merely 1.79%. The extravagant was Reliance Tax Saver Plan. It diverted 2.50% of the
returns earned towards the operational expenses which included items like fund manager’s
fee, audit fee etc. Two of the private sectors ELSS are giving similar highest average expense
ratios of 2.29% (ICICI Prudential Tax Plan and Reliance Tax Saver Plan) and the least
average expense ratio is of SBI Magnum Balanced Plan at only 2.08%. Hence it can be
concluded that public sector sponsored ELS schemes are better performers than the private
sector in terms of expense ratio. This may be because private sector funds have to make extra
efforts to build a brand name as strong as the public sector’ s name.

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 Performance Evaluation of ELSS

9.4.11 Modigliani–Modigliani measure

M2 or M2 or Modigliani–Modigliani measure is a measure of the risk-adjusted returns

of an investment portfolio. It measures the returns of the portfolio relative to that of some
benchmark, after adjusting its deviations also known as its risk Table 9.14 shows the M
square values of the selected ELSS as on 31st March 2010.

Table -9.14

Comparative Table for M – Square (%)

G – growth option D – dividend option (As on 31st March 2010)

HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity
Saver Plan Saver* Tax Gain Tax Savings

G D G D G D G D G D

1.244 1.568 0.799 1.482 -0.113 0.090 2.283 2.342 0.773 1.709

*Introduced on 22/09/2005

A higher M2 value indicates that the portfolio has outperformed the benchmark. Here
the benchmark is S&P CNX 500 Index. It can be clearly seen in the table that the best
amongst all ELSS in terms of M2 is SBI Magnum Tax Gain Scheme (dividend option =
2.342% and growth option = 2.283%) which is a public sector sponsored fund. Amongst the
private players HDFC Tax Saver dividend option has given best results (1.568%). Hence it
can be interpreted that Reliance Tax Saver Plan growth option could not give equivalent
results to that of the market at same levels of risk. Therefore the conclusion is that under this
parameter for evaluating performance of mutual funds public sector ELSS have given shining
results.

9.4.12 Jensen’s Alpha

Jensen’s Measure or Alpha is the most commonly used method of determining the
return that should have been earned by the schemes at a given level of risk.

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Table -9.15

Comparative Table for Jensen’ s Alpha

G – growth option D – dividend option (As on 31st March 2010)

HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity Tax
Saver Plan Saver* Tax Gain Savings

G D G D G D G D G D

-1.471 -1.309 -1.091 -1.144 -1.694 -1.702 -0.588 -0.730 -1.293 -1.276

*Introduced on 22/09/2005

In other word it shows the abnormal return of a security or portfolio of securities over
the theoretical expected return. Table 9.15 gives the values of Alpha for the five ELSS as on
31st march 2010. Here risk free rate of return considered is 91 day Treasury bill. A higher and
positive Alpha means that the returns tend to be higher than the expected beta statistics. All
the values so calculated in the table above are negative. Hence it can be analyzed that all the
ELSS will not be giving expected returns at set standard of risks. The best amongst the worst
is SBI Magnum Tax Gain Plan (dividend option = -0.588 and growth option = -0.730). And
the fund which has underperformed is Reliance Tax Saver (dividend option = 1.694 and
growth option = 1.702). For these reasons it can be pointed out that public sector sponsored
ELSS are better off as compared to private sector sponsored ELSS under Jensen’s Measure.

9.4.13 Information Ratio

The information ratio is similar to Sharpe ratio but, whereas the Sharpe ratio is the
excess return of an asset over the return of a risk free asset divided by the variability or
standard deviation of returns, the information ratio is the active return to the most relevant
benchmark index divided by the standard deviation of the "active" return or tracking error. In
table 9.16 Information Ratios of all the selected ELSS are given as on 31st March 2010.
Higher the IR higher is the active return given the amount of risk taken.

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 Performance Evaluation of ELSS

Table -9.16

Comparative Table for Information Ratio

G – growth option D – dividend option (As on 31st March 2010)

HDFC Tax ICICI Pru Tax Reliance Tax SBI Magnum UTI Equity
Saver Plan Saver* Tax Gain Tax Savings

G D G D G D G D G D

-0.764 -0.916 -0.875 -0.591 -0.588 -1.700 -1.370 -0.774 -0.784

-0.680

*Introduced on 22/09/2005

Since all IRs in the above table are coming out to be negative, the least negative
would be the best performer. According to this bases Reliance Tax Saver both dividend and
growth option are best. The least active returns at a given level of risk is provided by SBI
Magnum Tax Gain Plan at IR more than -1. Hence public sector funds are poor performers in
terms of active returns.

9.4.14 Statistical testing of difference between average NAVs of selected ELSS:

The data for the ELSS was tested separately for growth and dividend option. To begin
with the choice of the five schemes has been justified by trying to know whether there is
significant difference between the average NAVs of their ELSS or not. For this ANOVA was
applied on the following hypothesis:

Ho :There is no significant difference between the mean of average NAVs of the five growth
schemes selected.

For testing the null hypothesis the results and interpretation of ANOVA test are discussed
below:

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 Performance Evaluation of ELSS

Table – 9.17

ANOVA results for mean of NAVs of ELSS

Sum of
df Mean Square F Sig.
Squares

Between
26294.919 4 6573.730 5.137 .002
Groups

ELSS
Within
51185.258 40 1279.631
(Growth)
Groups

Total 77480.177 44

Between
4706.273 4 1176.568 7.413 .000
Groups
ELSS
Within
(Dividend) 6348.821 40 158.721
Groups

Total 11055.094 44

Table 9.17 shows the output of the ANOVA analysis and whether we have significant
difference between our group means. In the case of growth option significance level is 0.002
and 0.000 for dividend option, which are less than 0.05 therefore null hypotheses is rejected.
Hence null hypothesis which states that there is no significant difference has to be rejected.
The interpretation will be that there is significant difference between the selected mutual fund
average NAVs.

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 Performance Evaluation of ELSS

Now to check whether there is significant difference between average NAVs of the
selected public sector sponsored ELSS and private sector ELSS t–test has been used. The
hypothesis set for testing is mentioned below:

H0 : There is no significant difference between the mean of average of average NAVs of the
public sector sponsored and private sector sponsored ELSS.

The results of this test are discussed below.

Table – 9.18

Group Statistics of ELSS

COMPANY N Mean Std. Deviation Std. Error Mean

ELSS Private 25 56.418 51.6207 10.3241

(Growth)
Public 20 27.165 14.5439 3.2521

ELSS Private 25 24.2484 17.74525 3.54905

(Dividend)
Public 20 22.9785 13.53304 3.02608

From the above table it is clearly visible that the values of mean and standard
deviation are different for public and private ELSS. But the significance of this difference is
equally important. Hence to understand whether this difference is significant or not t – test
results are mentioned in the table given below.

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 Performance Evaluation of ELSS

Table – 9.19

Results of Independent Sample t Test

Levene's Test t-test for Equality of Means

for Equality of
Variances

95% Confidence
Interval of the
Difference
Sig.
(2- Mean Std. Error
F Sig. t df tailed) Difference Difference Lower Upper

Equal
variances
29.706 .000 2.453 43 .018 29.2534 11.9275 5.1992 53.3076
assumed

ELSS
Equal
(Growth) variances
not
2.703 28.643 .011 29.2534 10.8242 7.1034 51.4034
assumed

Equal
variances
assumed .806 .374 .264 43 .793 1.26990 4.80636 -8.42304 10.96284

ELSS

(Dividend)
Equal
variances
.272 42.924 .787 1.26990 4.66400 -8.13644 10.67624
not
assumed

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 Performance Evaluation of ELSS

Levene’s test indicated by the p value helps us in deciding whether we should assume
equal or unequal variances. If p value is < 0.05 the evidence suggests that the variances are
unequal. Here the p value of Levene’s test is 0.000 for growth option and 0.374 for dividend
option. So we use the equal variance line for the t – test for the means of dividend option and
unequal variance line for the t test for the means of growth option. The value of t test is 0.793
for dividend option and 0.011 for growth option. Thereby it leads to the rejection of null
hypothesis (H0) which states there is no significant difference between the mean of NAVs of
public sector sponsored and private sector as far as ELSS are concerned in case of growth
option and acceptance of the same hypothesis in case of dividend option. The reason for this
is that dividend options do not intend at increasing the NAV value of the funds hence their
NAVs do not differ much from their competitors.

9.5 CONCLUSION

On the whole taking ELSS as the representative sample for the Indian mutual funds
industry it can be summarized by saying that mutual funds are fast becoming the preferred
choice of investment for the literate working class as that are capable of providing better
returns than the other tax saving options. Despite the decrease in the no. of scheme options
available in the market in this category their AUM has increased manifold. But future of
mutual funds will be interesting to watch out for as ELSS is not eligible for tax benefits under
the DTC (Direct Tax Code), but since the implementation of the new tax regime has been
postponed, investors can park their funds in these equity schemes for now. (Source:
http://www.financialexpress.com/news/elss-better-than-ppf-nsc-crisil/929093/). The analysis
of the tax saver ELSS can be put in a nutshell by saying that private sector has given much
superior results as compared to the public sector sponsored ELSS. The parameters under
which private sector ELSS have recorded better Figures are average annual NAV, percentage
growth in NAV, total Return, beta, R –Square, standard deviation, CAGR, risk adjusted
CAGR and information ratio.

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