Extending the tax rebate carrot for investment in Equity Linked Savings Schemes (ELSS) with a view to wean people away from investing in gold is unlikely work if the performance of the existing ELSS is any indication.
Investors in the equity markets are different from those seeking to use this option for tax saving in that while the former are aware of how the markets behave and are prepared to navigate market upheavals, the latter are a more cautious lot who are keen to preserve their principal even while seeking appreciation in the value of their investment, according to a section of market players here.
A comparison of the performance of the ELSS over a one-, three- and five-year period with equity diversified schemes over the same period throws up glaring gaps in their returns even on a one-year basis. It is true that returns of the last one year is not a true measure of the performance of the funds because the comparison would be from the time when the markets crashed in December last year to date. This might create misleading euphoria about the MF's performance — whether ELSS or Equity Diversified — because of the base effect.
Moreover, while ELSS investment offers a tax rebate, the other option does not. But for highly salaried people, the opportunity to fully utilise the Sec 80 C ceiling of Rs 1 lakh exclusively through ELSS is limited because they mainly use their PF contributions, insurance premium payments, fixed return products such as NSC or PPF and the housing loan principal to exhaust the ceiling under this Section.
For ELSS investors holding on to their investments for at least three years, the lock-in prevents them from booking profits or limiting loss by selling out. For instance, a look at the top five ELSS funds as ranked by ICRA Online would show that none figures in all the three categories — five years, three years and one year or retains the same ranking in all. There is wild yield-swing as well.
On a one-year basis, Reliance Tax Saver tops the chart with a return of 42.32 per cent, while the IDFC Tax Advantage fund is ranked fifth with a return of 33.49 per cent. While Reliance Tax Saver retains the first place over a three-year time horizon, the return drops dramatically to 11.58 per cent. IDFC Tax Advantage, while retaining the fifth spot, has given a return of only 9.94 per cent. Over a five-year period, the highest ELSS yield was just 5.25 per cent by Religare Tax Plan, while at fifth place was L&T Tax Advantage that gave 4.9 per cent. All the yields related to the growth option of the respective schemes.
Compare this with Diversified Equity Funds’ yield for the same period. On a 12-month basis, Principal Emerging Bluechip tops the list with a yield of 49.69 per cent and the lowest among the top five was Canara Robeco Emerging Equities that gave a 47.2 per cent return. Over a three-year period SBI Magnum SFU — Emerging Business Fund was the top performing fund with a return of 23.57 per cent whereas IDFC Premier Equity Fund-Plan A came 5th with a 15.63 per cent yield. Over a five-year period ICICI Prudential Discovery Fund-IP topped the charts with a return of 11.29 per cent while Quantum Long Term Equity Fund came out fifth with a return of 8.84 per cent.
In such a scenario, why should an investor opt for ELSS when a diversified equity fund gives a better return even after factoring in the lack of tax rebate? Its advantage is the liquidity it offers, apart from better yield.
Speaking to Business Line, K. Annamalai, former President, Coimbatore Stock Exchange (CSX) said fixed income earners looking for tax saving do not view investing in ELSS aggressively, more so because of the three-year lock-in. They feared for the market status at the time of maturity because any market fall would erode the value of their investment at the time of redemption.
He said compared to earlier years when wage earners rushed to tax-saving investment options such as insurance or PPF in the last quarter, much thought goes into choosing products for investment for tax-saving purposes. ELSS investment does not figure as a top choice for such investors.
Annamalai suggested that a better option for the Government would be to make the equity investment for tax-saving purposes simpler by enabling investment in IPO/ primary markets/ any MF product eligible for tax relief on submission of proof of investment while filing the tax return by investors.
He said even the recently launched Rajiv Gandhi Equity Savings Scheme (RGESS) has not made a visible impact on first-time investors, even if it is early days. Under the RGESS, tax benefits to first-time investors investing in permitted securities, mutual funds or ETFs are extended, if annual income is sub-Rs 10 lakh subject to a maximum deduction limit of Rs 50,000. It will be a one-time bonanza. Sans some of the riders, RGESS might attract investors, he felt.