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R. Yegya Narayanan

Coimbatore, Aug. 3 The market meltdown in the past seven months has raised a question as to whether the investors should opt for the Equity Linked Savings Scheme (ELSS) of mutual funds or take a mix of fixed income tax saving investments and diversified mutual funds that would provide them with some flexibility even while offering tax benefits.

The question has arisen because of the steep decline in the value of equity linked savings schemes which come with a lock in period of three years, thus blocking the exit route for the investors in any falling market before the mandatory three year period is served.

It is true that it is not only the ELSS but the diversified mutual funds which have taken the stick in the sharp fall the market has witnessed in the past seven months-from a high of 21,000 + points of BSE Sensex in January to 14000 + now. The ELSS seeks to provide long term benefits to the investors and the lock in period gives the fund manager the freedom to take investment decisions without worrying about redemption pressures. And the tax benefit that it provides under Sec 80C is the icing on the cake.

But the sustained market volatility has led to a huge fall in the NAV of ELSS of even established fund players with proven track record. The rising interest rates of bank deposits and the fact that diversified equity funds offer the flexibility of cashing out in a falling market without worrying about lock-in period lend support to this view.

A look at the data published by Value Research in the latest issue of ‘Mutual Fund Insight’ would show that the returns from Tax Planning Equity Funds had sharply come down not only on a one year basis but on a three year basis as well, which should be of concern. The inconsistency in performance of fund houses also is visible and some of the funds that figure prominently in five year category of top performing funds do not find a place in the next two categories – three years or one year.

In the 5 year category, SBI Magnum Taxgain was the top performing fund, giving an annualised return of 53.90 per cent (all data as on June 30, 2008) and next came Sundaram BNP Paribas Taxsaver that sizzled with a return of 41.65 per cent. That Franklin India Taxshield with 33.48 per cent return was placed only 10th would show what scorching pace of growth these funds had established in five years.

But in a three year period, the highest spot went to Sundaram BNP Paribas Taxsaver with a return of 27.99 per cent and Principal Tax Savings was second with 25.50 per cent return. But the one year ranking gives a disturbing picture of only three funds providing a positive return and the other seven top performing funds were able to figure in the list not because of any stellar returns but because they contained the fall in value compared to other funds! Taurus Libra Taxshield with 12.03 per cent return tops the list and Sundaram BNP Paribas Tax Saver came second with 2.47 per cent. All the others ranked were in the red, with their returns ranging from -3.49 per cent to -10.22 per cent.

Explaining the reasons for the wild swing in performance, Mr Hitesh Agrawal, Head-Research, Angel Broking, Mumbai, said the performance may vary depending on Government policies and business environment of a particular sector and “valuations at which stocks are purchased by a mutual fund would also have an important role to play”. If some funds had invested in power, capital goods and engineering, and real estate sectors some 6-9 months back, they would have underperformed as “valuations in this space have been de-rated considerably” whereas funds with greater exposure to IT and/or pharma would have given better yield than their peers.

Mr K.Venkitesh, National Head-Distribution, Geojit Financial Services Ltd, Mumbai, was of the view that ELSS invest across all sectors because of the flexi cap mandate. Funds which could do relatively better did so due to “better stock picking capability and probably higher concentration (in) specific stocks”.

If one looks at the three to five year returns of diversified mutual funds, one could see that their returns are comparable and in some cases better than ELSS from the same fund family. Birla Sun Life Frontline Equity has given a three year yield of 27.5 per cent and a five year yield of 34 per cent. DSPML Equity has provided a three year return of 31.5 per cent and a five year return of 43.1 per cent. Franklin India Prima Plus over three years had given a return of 25.7 per cent and 36.4 per cent over five years.

An ICRA Online report shows that the equity diversified funds and tax planning funds are running a close race (as on June 30) if one looks at a return over one year period.

While the returns (negative) given by equity diversified funds as a category is -11.56 per cent, the returns(negative) of the tax planning funds as a category is -11.88 per cent. But over a three year period, equity diversified funds edge out the tax planning funds with the former giving a yield of 21.34 per cent compared to 18.26 per cent by the tax saving funds.

Will the market turmoil lead to investors having a re-look at their ELSS investment options?

Mr Venkitesh was very optimistic about ELSS and the capital market’s future and suggested that investors should take the SIP route.

Mr Agrawal said considering the current valuations and potential over the next 3-5 years, “staying away from Equities carries a greater risk than staying with it.”

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