We have always advocated the idea of starting the tax-planning exercise earlier in the year. Now with financial year 2006-07 behind us, there is a danger of complacency setting in with regards to tax-planning for the next financial year. In our view, it is a good idea to commence your tax-planning exercise for the next year beginning now, rather than wait for March.

This is particularly helpful with regards to one tax-saving avenue -- tax-saving funds, also known as equity-linked saving schemes (ELSS). This is because when stock markets are low (like they are at present), prudent financial planning dictates that invest right now, instead of waiting for March, when you have no idea where markets are going to be.

In order to make it easier for risk-taking investors who want to plan their tax-savings at the earliest, we present two tax-saving funds that they must consider investing in.

HDFC TaxSaver (HTS) and HDFC Long Term Advantage Fund (HLTAF) are two leading tax-saving funds belonging to HDFC Mutual Fund (net assets Rs 283.6 bn as on March 30, 2007). We chose these two funds mainly for three reasons:

1. HDFC Mutual Fund is one of the more respectable names in the industry and pursues a team-based investment approach guided by well-defined processes. The fund managers play an important role in the fund house, but their departure does not put the fund's performance at risk.

2. These funds have delivered steady performances across market cycles, particularly the downturns and above-average performance across all parameters related to net asset value (NAV) performance and risk (Standard Deviation and risk-adjusted returns).

3. Although they are from the same fund house, in terms of fund management style, investment approach and risk profile, they are distinct from one another. Hence, they can co-exist in one portfolio without overlap.

In the light of the same, we put the two funds under the scanner to determine how they are distinct from each other and the value they can add to the investor's portfolio.

HDFC TaxSaver Fund
Launched in December 1995 as Zurich India Tax Saver Fund, the fund was re-christened HDFC TaxSaver, subsequent to its take over by HDFC Mutual Fund. HTS is among a handful of tax-saving funds to have completed more than a decade in business, and over this period, it has been among the more consistent funds in the tax-saving category.

Unlike its sibling - HTLAF, HTS is managed aggressively in line with the growth style of investing. This involves investing in well-managed companies that may be fully/fairly valued, with the expectation that they are likely to do even better going forward.

As a mandatory feature, tax-saving funds have a 3-Yr lock-in period, thus compelling investors to take a long-term view on equity markets. The same duration, in our view, is ideal for analysing the performance of all equity funds including tax-saving funds. HTS's NAV has risen by 49.9% CAGR (compounded annualised growth rate) and 46.5% CAGR over 3-Yr and 5-Yr respectively. Since inception (in December 1995), its NAV has risen by 40.2% CAGR.

Over the years, HTS has developed a knack for making relatively correct investment calls (like selling technology stocks well before the meltdown in February 2000). This has helped the fund tide over volatility despite pursuing a relatively aggressive investment strategy.

Its aggressive style is particularly evident in its top 10 holdings (44.7% of net assets as on February 28, 2007; although this is a marked departure from the 60% we have seen earlier). At Personalfn, we maintain that diversified equity funds should hold no more than 40% of net assets in the top stocks and to that end, HTS appears aggressive. Even sectorally, the fund takes aggressive investment decisions.

In terms of volatility, HTS has exposed investors to higher degree of risk as compared to its sibling HLTAF. This can be seen in its higher Standard Deviation (7.04%) figure.

This implies that HTS's aggressive investment strategy has paid off in parts; while the impact on the NAV performance has been positive, this has come at price, which is reflected through higher volatility (Standard Deviation).

On the risk-adjusted return parameter (Sharpe Ratio 0.37%), the fund has pitched in a better performance than HLTAF. This implies that HTS has rewarded investors with a higher return vis-�-vis a risk-free benchmark instrument.

In our view, investors with an appetite for higher risk must consider adding HTS to their portfolios.

HDFC Long Term Advantage Fund
The fund was launched in January 2001 as HDFC Tax Plan 2000. It is the original tax-saving fund from HDFC Mutual Fund, unlike HTS, which is from Zurich India Mutual Fund.

HDFC Long Term Advantage Fund (HLTAF) has made a name for itself as a well-managed tax-saving fund pursuing the value style of investing. Value investing involves selecting well-managed companies that are trading at a discount to their fair value.

The fund manager remains invested in such companies till the time they attain their fair value. This is a relatively conservative approach as opposed to growth style of investing pursued by HTS. In terms of diversification, HLTAF hunts for value picks across large caps and mid caps.

The fund's NAV has appreciated by 41.0% CAGR over 3-Yr and 49.9% CAGR over 5-Yr. Since inception (in January 2001), the NAV has grown by 41.3% CAGR.

HLTA has a well-diversified portfolio with 38.4% of net assets in top 10 stocks, which fares well against our criterion of 40% for diversified equity funds. However, sectorally it is not as diversified.

But that hasn't made the fund compromise on its volatility (Standard Deviation of 6.05% compared HTS's Standard Deviation of 7.04%). The fund has also generated above-average risk-adjusted returns (Sharpe Ratio 0.34%).

In our view, investors with an appetite for moderate risk will benefit by investing in HLTAF.

We also did a small analysis to determine how much Rs 100 invested 5 years ago in HTS, HLTAF and the BSE Sensex has grown over the years. The results are there for all to see.

Rs 100 invested 5 years ago in the BSE Sensex would have appreciated to Rs 374.2 (30.2% CAGR). On the other hand, the same amount invested in HTS and HLTAF would have grown to Rs 674.8 (46.5% CAGR) and Rs 756.8 (49.9% CAGR), respectively.