ITI Long Term Equity Fund: A Tax Saving Proposition for Long Term Investors
Aug 01, 2019

Author: Aditi Murkute

(Image source: Business photo created by Waewkidja - www.freepik.com)

Considering, the bears trying to take the reign of the equity market, with most of it is struggling and is down by approximately 30-60 percentage. Allocating funds to a single segment of the market can prove to be detrimental.

Hence, it makes sense to create a fund that offers flexibility to move across market cap segments and is sector agnostic. Recently, a small fund house, ITI Mutual Fund has launched ITI Long Term Equity Fund (ITILEF). It is an open-ended, equity-linked saving scheme, with an aim to provide a long-term capital appreciation for investors.

[Read: More Fund Launches Lined By ITI Mutual Fund: All You Need to Know]

Equity-linked saving schemes (ELSSs), are highly diversified equity funds that offer a dual benefit of capital appreciation over a long term due to investments in equity and tax rebate under Section 80C (up to Rs 1.5 lakh) as well. A distinguishing feature about ELSSs is that they are subject to a compulsory lock-in period of 3 years, but the minimum application amount in most of them is as little as Rs 500, with no upper limit.

[Read: Should You Be Investing in ELSS At The Beginning Of The Financial Year?]

ITI Mutual Fund will adopt a differentiated approach of portfolio construction that will be benchmark agonistic, to manage risk during bullish and bearish market scenarios. As mentioned by the fund house, under normal circumstances the fund will be at least 90% invested in equities. Its typical portfolio construction would include 40-70 stocks.

For the purpose of allocation between Large, Mid and Small Cap segments it will follow a unique internal research-driven process which is based on valuation, expected earnings growth, market and business cycles. Allocation towards market cap segments will be based on the relative attractiveness of the segments and can vary between 0% to 100%.

Since the scheme will invest more than 80% of its total assets in equity and equity-related securities. So, from a risk-return standpoint, ITILEFF is a high-risk high-return investment proposition.

Graph: Risk return curve of equity funds

Risk return curve of equity funds
(PersonalFN research)


On the risk-return curve, an ELSS fits in-between value funds and focused funds. So, do note that although an equity-linked saving scheme comes with some safety element of large caps, they also carry the risk associated with mid and small caps and have a mandatory lock-in period of three years.

Hence investors should consider investing in an ELSS only if their risk appetite permits, i.e. it is high, and if the investment time horizon is at least 3 years. In the long-term, if you intend to create wealth, then a tax-saving fund could potentially clock lucrative inflation-adjusted returns if the portfolio construction is done astutely and risks are managed well.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

You can do either lump sum investments or investments through a Systematic Investment Plan (SIP). In the case of the latter, each instalment has a 3-year lock-in period. Both individuals and HUFs are entitled to invest in ELSS.

[Read: Which Are The Best ELSSs (Tax Saving Funds) For 2019?]

Table 1: Details of ITI Long Term Equity Fund

Type Open-Ended equity-linked saving scheme with a statutory lock-in of 3 years and tax benefit Category Equity-linked saving scheme
Investment Objective To provide long-term capital appreciation by investing predominantly in equity and equity-related securities.

However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The scheme does not assure or guarantee any returns.
Min. Investment Rs 500 and in multiples of Rs 500 thereafter Face Value Rs 10 per unit
Plans • Regular

• Direct (default option)
Options • Growth (default option)

• Dividend Pay-out
Entry Load Nil Exit Load Nil
Fund Manager Mr Pradeep Gokhale and Mr George Heber Joseph Benchmark Index Nifty 500 Total Return Index
Issue Opens: July 15, 2019 Issue Closes: October 14, 2019
(Source: Scheme Information Document)


How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of the scheme will be as follows:

Table 2:  ITILTEF's Asset Allocation

Instruments Indicative allocations(% of Total Assets) Risk Profile
Minimum Maximum High/ Medium/ Low
Equity & Equity related securities 80 100 High
Short Term Debt & Money Market instruments* 0 20 Low to Medium
*Money Market Instruments include CPs, commercial bills, Corporate Debt, T-Bills, and Government securities having an unexpired maturity up to one year, CDs, usance bills, Tri party repos, Repo/ Reverse Repo and any other like instruments having a maturity of 1 year or less, as specified by the RBI from time to time. Short Term Debt instruments include debt instruments with daily to monthly put/call options, debt instruments with maturity less than one year and other like debt instruments.
As per ELSS Guidelines, the funds collected under the Scheme shall be invested in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies. Investment may also be made in partly convertible issues of debentures and bonds including those issued on rights basis subject to the condition that, as far as possible, the nonconvertible portion of the debentures so acquired or subscribed, shall be disinvested within a period of twelve months. Further, it shall be ensured that funds of the Scheme remain invested to the extent of at least eighty per cent in securities specified above. Further, as per the ELSS Guidelines, Mutual Fund may hold up to twenty per cent of net assets of the plan in short-term money market instruments and other liquid instruments to enable it to redeem investment.
(Source: Scheme Information Document)


What will be the Investment Strategy?

The ITI Long Term Equity Fund will invest in a diversified basket of equity stocks spanning the entire market capitalization spectrum and across multiple sectors, debt and money market instruments.

The Fund would identify companies for investment, based on the following criteria amongst others:

  1. Good track record of the company

  2. Potential for future growth

  3. Industry economic scenario

The Fund will also invest a portion of the funds in initial offerings and other primary market offerings. The risk will be managed through adequate diversification by spreading investments over a wide range of companies.

The Scheme may take advantage of Situations that present an investment opportunity to Fund Manager who can judge the implications of that opportunity that can unlock value for investors. Some of these situations are:

  • The merger of businesses or companies which may result in synergies in business activities.

  • Demerger may result in separation/spin-off of business operation/activity from some other business operation/activity.,

  • Companies may consider a buy-back of their shares from the market due to various reasons (like the company has substantial free reserves, management is confident of the future growth potential, meeting with the regulatory norms, etc. A buyback unlocks significant value for shareholders.

  • Debt restructuring i.e. a company may want to change its capital structure by means of reducing debt. Higher debt can lead to lower profits and cash flows. An attempt by the company to reduce debt or swap the same with other lower costs options can unlock value for shareholders.

There could be many other events that may result in share price appreciation. Such situations may include but are not limited to turnarounds, companies undergoing restructuring, asset plays, and companies affected by regulatory changes and primary market listings. The scheme will carefully analyse any such instance and participate in the same as such. Corporate action often unlocks a lot of value for the investors.

Who will manage the ITI Long Term Equity Fund?

ITI Long Term Equity Fund will be co-managed by Mr Pradeep Gokhale and Mr George Heber Joseph.

Mr Pradeep Gokhale joined ITI mutual fund as the Senior Fund Manager. He has a bachelor's degree in commerce (B. Com), is a Chartered Accountant and CFA. He has a work experience of over 23 years in Fund Management, Equity Research, Credit Evaluation & ratings.

Before joining the fund house, he has been associated with the Fund Management Team of Tata Asset Management for 14 years. Prior to joining Tata Asset Management, he was Head of Financial Sector and Securitisation Ratings at CARE Ratings Ltd. He has also worked in corporate finance departments of companies like Bombay Dyeing, Tata International and Lubrizol India Ltd.

Mr George Heber Joseph is the Chief Executive Officer (CEO) and Chief Investment Officer (CIO) at ITI Mutual Fund. He holds a bachelor's degree in English language & Literature (BA) and commerce (BCom). Mr George is also a qualified member of associate member of Chartered Accountants of India and an associate member of Cost and Management Accountants of India. He has over 16 years of work experience in Fund Management, Equity Research and Capital Markets.

Prior to joining, ITI Mutual Fund, he was working as a Senior Fund Manager (Vice President Grade & Key Management Personnel) at ICICI Prudential Asset Management Co. Ltd. handling two flagship funds. He was associated with the Fund Management Team of ICICI Prudential Asset Management Company Limited for nearly a decade tracking various sectors and a wide variety of stocks. During his tenure, he was also heading the Portfolio Management Services Division, was responsible to oversee fund managers activities, managing research analysts, performance measurement and work as a sounding board for fund managers. Before that, in his previous assignments, he has been associated with organisations like DSP Merrill Lynch Ltd, Wipro Ltd, MetLife India, Cholamandalam Investments & Finance Company Ltd and Tanfac Industries Ltd where he has handled fund management and corporate treasury responsibilities.

Currently, at the fund house, Mr Pradeep Gokhale and Mr George Heber Joseph together co-manages ITI Multi-Cap Fund, launched in April this year.

The outlook for ITI Long Term Equity Fund:

In an endeavour to achieve the stated objective of the ITI Long Term Equity Fund, the investments will be in equity and equity-related instruments predominantly and the fund managers will follow a bottom-up stock selection process.

[Read: Two Approaches To Portfolio Construction Followed By Fund Managers]

The fund managers will follow an equity investment philosophy (as given in the presentation) represented by "SQL" focusing on three main pillars.

"S": Margin of Safety,

"Q": Quality of the business,

"L": Low Leverage.

Based on extensive research, the fund managers will actively manage the portfolio and will flexibly invest across the market capitalization spectrum. The fund managers will create a robust portfolio of stock universe that is divided into core stocks and tactical stocks. Core stocks are companies that have a strong and sustainable competitive advantage in their respective businesses. Tactical stocks would comprise of good companies going through temporary problems, with a possible upside catalyst.

The fund managers will focus on choosing companies that are fit properly as per the GARP style of investing - Growth at Reasonable Price and not growth at any price. Besides to control the risk emanating from investing in equities risk during bullish and bearish market scenarios it will follow a differentiated strategy and suitably align the portfolio.

Image: Risk limit exposure of stocks

Risk return curve of equity funds
(Source: ITI Long Term Equity Fund Presentation)
(Illustrative Purpose only)


Given the asset allocation, the fortune of the ITI Long Term Equity Fund will be closely hinged onto the performance of the stocks held in the portfolio.

Currently, the equity markets have experienced sharp corrections, Small caps and mid-caps have tumbled. Large caps too have been fallen. Owing to weak consumer sentiment, the economy shows signs of subdued performance. Although the market does offer some value buying opportunities.

[Read: Looking for The Best 'Value Funds' For 2019? Find Out Here]

But India Inc's result season earnings multiples do not make sense as per the value of the company. Global headwinds are also in play such as the geopolitical tensions, so going ahead the equity markets are expected to remain highly volatile.

During such times, volatility will be obvious and therefore constructing the portfolio will not be an easy task for the fund managers. Thus, the fortune of the ITILTEF will be closely linked to how well the fund managers and his team assess the scenario and risk management measures they adopt.

[Read: Why You Should Strategically Structure Your Portfolio Now?]

PS: If you need superlative guidance to select mutual fund schemes that have the potential to provide BIG gains, want to do tax planning with ELSS, and want to know which ones are worthy to start a SIP in, PersonalFN has come up with an exclusive three-in-one combo offer. Click here to know more. 

This article first appeared on Certified Financial Guardian.  



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