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Suresh Krishnamurthy

EQUITY-Linked Savings Schemes, more popularly known as tax-saving funds, have acquitted themselves well between March 2003 and March 2005. On an average, they have delivered better returns than the average diversified equity fund, even on a risk-adjusted basis.

They have, however, been less consistent than diversified equity funds. This need not be a major problem for investors as there are a handful of tax saving equity funds that are also consistent.

Attractive concept: Tax-saving funds constitute just over 1 per cent of the assets under management of mutual funds in the country.

The concept of tax-saving funds has, however, always held interest for the serious mutual fund investor.

Tax-saving funds offer mutual fund managers more flexibility than their non-tax saving counterparts.

This is because redemptions from tax saving funds are regulated — investors need to stay invested for at least three years.

Restrictions on redemptions were expected to provide stability to the assets under management and thus help fund managers deliver better returns.

The open-end nature of diversified equity funds, in contrast, was seen as encouraging volatile fund flows that would detract from the fund's performance.

The structure of tax saving funds offer the fund managers an opportunity to make higher returns at lower risk.

Judged from this perspective, tax savers have not delivered exceptionally superior returns.

Fund managers do not seem to have taken advantage of the promise offered by the structure of tax-saving funds. Nevertheless, the performance compares favourably with that of diversified equity funds:

Tax savers, on an average, gained 4.89 per cent per month between 2003 and 2005. This is higher than the 4.64 per cent gained by an average diversified equity fund and 4.03 per cent gained by the BSE-200.

The fluctuation in the monthly returns of an average tax saving fund was nearly 4 per cent lower than that of an average diversified equity fund.

The risk-adjusted return of an average tax saving fund, at 5.68 per cent, was higher than the 5.59 per cent for an average diversified equity fund.

In terms of consistency, the average tax saving fund out-performed the BSE-200 in 14 months while the average diversified equity fund did better than the BSE-200 in 15 months.

Overall, the performance of tax saving funds has been impressive. They are, however, not as superior to non-tax saving equity funds as they should have been.

The star performers: There are not many equity tax saving funds on offer.

Those with a track record of more than two years number only 17, compared to about 60 diversified equity funds.

Among them, six have delivered noticeably attractive performance — Birla Equity Plan, Franklin India Taxshield, HDFC Long Term Advantage, HDFC TaxSaver, Magnum Tax Gain and Pru ICICI Tax Plan.

Among the six, SBI Magnum Tax Gain's performance has been spectacular, very similar to that of the diversified equity fund — SBI Magnum Global.

It has notched up returns higher than that of all tax saving funds and has been more consistent.

Its risk profile has been higher than other funds, though it has the returns to compensate for the risk.

Franklin India Taxshield has been at the other end of the spectrum, recording returns lower than the average for tax-saving funds.

It has, however, been among the least risky — lower fluctuation in monthly returns — and also more consistent.

HDFC Long Term Advantage and HDFC Tax Saver have performed similarly in terms of returns and consistency in monthly performance.

The risk profile of Long Term Advantage has, however, been slightly lower, giving it a better risk-adjusted score.

PruICICI Tax Plan and Birla Equity Plan are among the most risky tax-saving equity funds.

They have, however, recorded attractive returns. They have also been consistent in their performance.

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