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Basics of tax-saving schemes

Nilanjan Dey

ELSS as a genre may not translate into 100 per cent happiness.

THE good news is I got a raise; the bad news is it all went in taxes. The dark humour apart, that is the crux of the message put across by Fidelity MF, which has lately warmed up to the concept of tax-saving funds.

The truth in the message is not hard to find - income tax is indeed unavoidable; it is as certain as birth, death and tomorrow's sunrise.

But can MFs really play a role in terms of helping people handle at least some tax issues? To know the answer, it is important to quickly look at the basics of equity linked savings schemes or ELSS (tax-saving funds to the uninitiated).

ELSS: As things stand, an open-end tax-saver is run quite like any other diversified equity fund, complete with a three-year lock-in, providing benefits under Section 80C. The trick, suggest asset management companies, is to actually leverage the lock-in to their advantage. The fund managers concerned need not care too much about possible exits by unitholders who want to put their monies elsewhere before the three-year period gets over.

Mr Arun Mehra, Fund Manager for Fidelity, notes that ELSS typically facilitates greater attention to equity allocation; in other words, the portfolio need not include a copious dose of cash. There can certainly be more exposure to stocks with a view to provide optimal performance.

But, as you may well argue, surely there are downsides as well. You may also like to believe that (like so many other things in life) the ELSS as a genre may not translate into 100 per cent happiness.

Bet on fund manager: So, what should investors watch out for? For one thing, as always, choosing the right fund manager is critical. What can really spoil your trip is under-performance vis--vis the broad market, not to mention the top performers in the category.

And what if the market sees an awful drop towards the end of the three-year period, caused by a reversal of all the good trends that may have happened in the early-to-mid stages of the lock-in? Again, that is a critical issue. An average investor, who is probably keen to move out at the end of those three years, may be stuck, unable to redeem at an NAV he thought will be his! At any rate, that will not be a happy scenario.

Let's turn to Mr Mehra again for a soundbyte. A well-managed ELSS, he suggests, will use those three years smartly and build a serious portfolio; the latter may well be expected to create wealth for unitholders.

The idea, he adds, will appeal to those who are interested in investing money that they will not need in the near future.

A comparison: The discerning investor may consider checking out the comparative performance of various tax-saving funds, including the open-end ones with larger asset bases. The performance these funds have generated will probably come as a surprise. We will leave the actual calculation to you, but one estimate suggests that Rs 1,000 invested in an ELSS in January 1998 will be over Rs 7,000 today.

While many fund houses already offer tax-savers, a few ELSS products are yet to be launched. Among these will be funds from Standard Chartered MF and Deutsche MF. For both, tax-savers will be a first. It needs to be seen how well the market responds to the forthcoming schemes.

Fund Speak

We continue to expect healthy earnings growth for the corporate sector in India on the back of strong GDP growth momentum, increasing domestic demand and export growth.

Mr A.K. Sridhar, CIO, UTI Mutual Fund

Feedback may be sent to nilanjan@thehindu.co.in

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