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I am new to mutual funds but want to invest in a suitable tax saving fund. How does Alliance Capital Tax Relief compare with other tax saving funds? I read that the fund has a good track record over six years, but has under-performed the index in 2001.

Ashwin Garg

Tax-saving funds are the only options available to you if you want to invest in equities and still claim a Section 88 rebate on your investment. Please note that all tax-saving funds carry a statutory three-year lock-in periodThere are several tax-saving funds available on tap. Of these, funds such as Alliance Capital Tax Relief, HDFC Taxsaver, HDFC Tax Plan 2000, Sundaram Taxsaver, Franklin Taxshield and PruICICI Tax Plan have a reasonable track record since launch.

However, as a first-time investor in mutual funds, we would suggest that you stick to the funds with a consistent five-year track record. In our opinion, these would be Alliance Capital Tax Relief and HDFC Taxsaver.

Alliance Capital Tax Relief did underperform the index in one out of the past six years. But given its good showing in five of the six years, you should probably not let a single year of underperformance worry you. But if you have a fairly large sum to invest, you should spread your investment between the two funds mentioned above.

Of the two tax-saving funds with a five-year track record, HDFC Taxsaver has fared better in terms of absolute returns over a five-year period, than Alliance Capital Tax Relief. While Alliance Tax Relief has generated an annualised return of about 24 per cent over a five-year period, HDFC Taxsaver has managed about 31 per cent.

Remember that, after the sharp rise in equity values over the past year, all equity funds carry some downside risk.

To reduce this risk, you may make your investments through the systematic investment plans offered by these funds. This will allow you to invest in a fund through equal monthly instalments spread over six months or a year, instead of investing lumpsum at one go.

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

AARATI KRISHNAN

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