Dec 17, 2009

Deceptive Marketing by MFs: Be Wary of Advertised Returns

Photo by Aphrodite

"Good is not good, where better is expected."

—Thomas Fuller

I don’t read MINT, but the day before yesterday my newspaper vendor inadvertently delivered a copy of MINT instead of ET. While flipping the pages of the newspaper, I came across an advertisement by Birla Sun Life Mutual Fund on the last page (page 24 of MINT dated 15 Dec 2009) claiming that two of its mutual fund schemes have delivered exceptionally good returns during the last 10 years (without considering the load).

The following claims were made:

i). At 24% CAGR your money multiplies 8 times in 10 years;

ii). 2 of our schemes have given more than 24% CAGR in last 10 years (as on 16 Nov 09)

a) Birla Sun Life Tax Relief’96 --> Value of Rs 1 lakh invested in scheme on 16 Nov 99 is now Rs 8.91 lakh @ 24.45% CAGR

b) Birla Sun Life Equity Fund --> Value of Rs 1 lakh invested in the scheme is now Rs 8.72 lakh @ 24.19% CAGR.

On the other hand, value of similar investment in benchmark (BSE 200) is Rs 4.21lakh @ 15.46% CAGR.

The first thought which crossed my mind was that how come such a great mutual fund scheme escaped my attention while I was writing the post: Best Tax Savings Schemes for FY 2009-2010.

So, I decided to take a second look and review the performance of Birla Sun Life Tax Relief’96 (BSLTR '96).

Review of Birla Sun Life Tax Relief’96
In the published advertisement, the 10-Yr returns are as on 16 Nov 2009 i.e. assuming the investments were made on 16 Nov, 1999. However, I checked the figures as per the latest data ((14 Dec 2009) available on Value Research, a mutual fund rating agency.

Here are the findings:

1. Current 10-Yr trailing CAGR of Birla Sun Life Tax Relief 96 (growth option) is 21.49% and its comparative position vis-à-vis other ELSS based on 10-Yr returns is as follows:

ELSS-----------------------------------10-Yr CAGR----Rank
HDFC Taxsaver-------------------------29.45%--------1/15
Franklin India Taxshield--------------25.00%--------2/15
Sundaram BNP Paribas Tax Saver---23.31%-------3/15
Birla Sun Life Tax Relief 96-----------21.49%--------4/15

We notice that although the performance of Birla Sun Life Tax Relief 96 is good considering last 10-yr returns, there are many funds which have given far better returns (note the difference of 8% in CAGR of HDFC Tax Saver and Birla Sun Life Tax Relief’96). For example, the amount of Rs 1lakh invested in HDFC Tax Saver and Franklin India Taxshield would have become 13.21 lakh and 9.31 lakh respectively as compared to 7.0 lakh in Birla Sun Life Tax Relief’96.

2. Next, though last 10 years returns are important but the returns earned in immediate past are more relevant than those earned in distant past (although both may or may not be sustained in the future). Do you know that Value Research ratings are also based on combined performance of last 3 years and 5 years? So let’s see Birla Sun Life Tax Relief 96 return performance for last 7-Yrs, 5-Yrs, 3-Yrs and 1-Yr (trailing CAGR returns):

7-Yr --------------30.99%---------------10/19
5-Yr --------------21.48%-----------------9/20
3-Yr --------------10.15%----------------10/26
1-Yr --------------103.83%----------------2/30

What do we observe? The fund has indeed performed quite well during the last one year. Nevertheless, the return ranking of last 7-Yrs, 5-Yrs and 3-Yrs returns is almost average. Why? Let’s see.

3. To get a better glimpse of its performance, we take a peek at its year-wise return performance of last five years :

Year------------Returns----------Rank----------- + (-) BSE 200

Here, we notice that this ELSS fund has beaten its benchmark (BSE 200) in three out of last five years. That’s nothing to be proud of!

That’s ok. What else do we notice? The most striking observation is that it’s one of the riskiest mutual funds in the ELSS category of equity funds. How? Please note the wide variation in returns. So, while Birla Sun Life Tax Relief 96 delivered extraordinary returns in the year 2009, 2007 and 2006, it was among the worst performers during 2008 (Rank 26/29) & 2005 (Rank 19/20).

4. To substantiate our findings that it is indeed a risky ELSS scheme, let’s take a look at various risk parameters. So, while risk grade of Birla Sun Life Tax Relief 96 is ‘above average’, beta (1.14) is highest in the ELSS category, even higher than Tauras Tax shield whose performance I reviewed earlier.

5. One more point worth noting is that Birla Sun Life Tax Relief ‘96 P/E multiple of 29.46 and P/B ratio of 4.12 (as on Nov 30 2009) is second highest in the ELSS category which indicates that the current valuations of the majority of the stocks in which the fund is invested is quite high thereby limiting the future return potential.

6. Finally, what about its rating by Value Research? Yes, this is in fact the most important factor to consider. Know that its current rating by Value research is 3-star. In other words, based on last 3 and 5 years risk-adjusted returns, Birla Sun Life Tax Relief 96 is an average performer not worth investing in when there are so many better alternatives out there.

Why did I write a review of a 3-star rated fund? What lesson do we learn from the above review of Birla Sun Life Tax Relief’96?

The message is clear: you should be wary of the returns advertised by the mutual funds. Investment decisions should never be based on such misleading claims made in advertisements. Literally speaking, the facts stated may be quite correct but the reality is that such an ad hides more than it reveals. So understand that before investing in mutual funds, it is necessary to look beyond the appearance in order to see the broader picture.

What’s your opinion?

P.S. Birla Sun Life Tax Relief 96 (BSLTR ‘96)is not worth investing as of now,although it has been adjudged World’s Best Performing Equity Fund for the 13-year period ended September 30 2009 as per Lipper global fund data. The above analysis shows that it has a long way to go before it finds its proper place in the best performing ELSS funds.

Also see:

1. Best ELSS for the FY 2009-10
How to Choose Best Equity Funds
3. Amazing SIP Calculators


  1. impressive

    can you have a look at sundaram bnp select midcap?

  2. AnonymousMay 13, 2010


    Iam planning to invest 50000 Rs. in ELSS scheme in order to have the tax sheild. Please suggest me If I can invest all the amount in HDFC TAX Saver Fund or invest 25000 in HDFC and remaining 25000 in other best fund.


  3. Hi muralee,
    i'd suggest u not to put ur entire invesment amount in a single fund.though hdfc tax saver is a top performing elss fund, u mus also put some amount of money in other comparable elss funds like canara robeco tax saver.also keep in mind to invest via the sip route to average out the cost of acquisition of the units from the fund.u may also try out other tax saving avenues like NSC, PPF, tax saving fixed deposits.25000 is a good amount to start with and if u feel u can purchase top ups later on if u feel the fund is giving u d expected returns.and yes stay invested beyond the maturity period to avail of lonf term benefits from the fund.


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