The Hindu Business Line : Fund Talk

I have into a SIP of HDFC Long Term Advantage Fund (dividend option) of Rs 5,000 per month from May 2005 till April 2007. When I started the NAV was at Rs 29, and now, after the correction in stock market, it has come down to Rs 39 from Rs 44. I want to know the following:

1. Compared to other ELSS & diversified equity funds how has the HDFC LTAF performed? Whether other reputed ELSS funds like HDFC TaxSaver have also given similar return, especially one-year, three- and five-year return?

2. How is the fund going to perform in the future, considering its track record? Whether I should consider switching to another better ELSS fund and, if yes, which one will be the best? What percentage increase in NAV can I expect considering that I am a long-term investor of 5 to 6 years?

3. Since I have considered dividend option, I have received one dividend payment of Rs 6 per unit. Will growth option give higher returns, as I am a long-term investor?

Haresh Jaguja

Your choice of HDFC Long Term Advantage Fund (LTA) as a tax-saving and long-term investment option is appropriate.

You have started your SIP only a year ago. This is too short a period to evaluate the returns that the fund has fetched you. The benefits of investing through SIP can be realised only over a longer period, when the market may go through different phases.

There has been a mild slack in performance of HDFC LTA over the past six months, thus dragging the one-year return. This can be attributed to the fund's defensive strategy. While peers such as HDFC TaxSaver increased exposure to market flavours such as engineering and construction, HDFC LTA has limited its exposure to such sectors.

The fund has also hung on to mid-cap value stocks at a time when most other funds were participating in the large-cap rally.

This defensive tilt has, however, come to the aid of the fund during the recent market turmoil. It has, so far, contained losses better than most other tax saving funds, including HDFC TaxSaver.

The three and five-year track record of the fund continues to inspire confidence. Its five-year track record places the fund at the top of ELSS schemes and among the top five diversified funds.

Given the impressive record, we are positive that HDFC LTA would return well and minimise risks. You can continue to invest in the fund through the systematic investment route. The current dip would enable you to average your costs.

You have not mentioned if HDFC LTA is the only tax saving option you have. If you are looking for diversification, Franklin India Taxshield may be a good option outside the HDFC fund house.

The fund has a large-cap bias and will provide a balance to your mid-cap-tilted HDFC LTA holding. The fund is, however, not the top performing one in its category and is more suited if you are a conservative investor. If you, however, have an appetite for risk, then Magnum Taxgain may be a better option. The fund has an impressive five-year track record.

Established funds are capable of delivering annualised returns of 12-13 per cent if you stay invested for at least a five-year period.

Avoid using dividend as a singular measure of your performance. If you have opted for the dividend option, view your fund's performance as a sum of dividend and capital appreciation to calculate returns. In choosing the dividend option, you are able to cash in on your investments periodically, considering that there is a three-year lock-in period.

However, as you are a long-term investor, you can switch to the growth option, as the fund is likely to prevail over market swings in the long term. The compounding effect over a longer period under the growth option will also ensure higher returns when you exit.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Vidya Bala

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