Monday, November 30, 2009

(November 2009)

Indian mutual funds booked Rs 12,639 crore profit in the first half of the financial year 2009-10 by selling equity. In the same period last year, fund houses had booked losses of Rs 3,858 crore. Their total loss on sale of investments in 2008-09 was Rs 25,000 crore. Of the 35 mutual funds that have declared half-yearly financial results for the period ended September 2009, six booked a profit of Rs 8,005 crore while the other 27 booked a combined profit of Rs 4,634 crore. The remaining two took a loss of Rs 254 crore. The V-shaped recovery in stock prices from the March 2009 lows has given profit-booking opportunities to fund managers. When markets worldwide fell sharply in the second half of 2008-09 owing to financial crisis in the US, fund managers booked losses to check further value erosion. The fund houses that have booked hefty profit are Franklin Templeton Mutual Fund (Rs 1,470 crore), HDFC Mutual Fund (Rs 1,388 crore), DSP BlackRock Mutual Fund (Rs 1,317 crore), Sundaram BNP Paribas Mutual Fund (Rs 1,313 crore), ICICI Prudential Mutual Fund (Rs 1,287 crore), and Reliance Mutual Fund (Rs 1,229 crore).

Piquant Parade

Bharti AXA Investment Managers has been awarded “The CMO (Chief Marketing Officer) Council Innovating Marketing Strategy Award” for Liq-uity Facility at the recently held CMO Council Awards. Liq-uity, introduced in June 2009, is a facility where the Daily Gains (Daily Dividend/Growth Option), if any, from Bharti AXA Liquid Fund or Bharti AXA Treasury Advantage Fund get transferred to Bharti AXA Equity Fund on all business days.

Regulatory Rigmarole

SEBI has paved the way for investors to buy and sell mutual fund units through stock brokers, thereby, extending the present convenience available to secondary market investors. The existing stock exchange infrastructure, with its reach to over 1500 towns and cities through more than 2,00,000 terminals, can be used for facilitating transactions in mutual fund schemes. Every mutual fund has to disclose the locations of its official points of acceptance in its offer documents and web sites. Stockbrokers will be eligible to be considered as official points of acceptance provided they get the AMFI certification and become empanelled distributors. Such a move is bound to widen the geographical reach of the mutual fund industry, which at present is concentrated on the top 10 cities. From the point of view of the investors, the choice of their transacting mutual fund deals has widened. The fee structure under this new system, however, is still unclear. The market regulator has asked the stock exchanges to provide detailed operating guidelines for facilitating transaction in mutual funds on their platform by their member-brokers.

The National Stock Exchange (NSE) plans to launch a new mutual fund service system or MFSS today. All trading members of the exchange who are registered with AMFI as mutual fund advisors and who have signed up with the specific AMC of a mutual fund are eligible to participate in the new MFSS. For this purpose, trading members shall have to register with NSEIL as participants by submitting an undertaking. Orders will be placed via NEAT-MFSS order collection system between 9 am and 3 pm. The investors have a choice of two modes of investments­­­­­­––the physical and the depository.

The NSE, which pioneered electronic trading in India, and NSDL will together develop a trading platform where mutual fund units could be bought or sold back to funds without an intermediary. To avoid a monopoly, the Association of Mutual Funds in India has also chosen Central Depository Services, a BSE sibling, and registrars CAMS-Karvy to develop a similar platform. The first phase of this online platform will be in place by March 2010. Initially, this would be an order-entry platform and not a trading platform. The second phase, which will see payments being made directly to exchanges, will kick off within three months of the completion of the first phase. This platform will change the way mutual funds are bought and sold in India.

AMFI has constituted a Committee to discuss the impact of extended trading hours on mutual funds and has asked the industry to suggest new mechanisms for a transition into a longer trading day. Over 60% brokers, out of the 395 surveyed by the Association of National Stock Exchange Members of India (ANMI), expressed displeasure at the move.

Fund accountants and administrators, who have been providing back-office services to the mutual fund industry for close to a decade, may soon come under the regulatory framework of SEBI. SEBI is planning to introduce the concept of professional fund accountants and administrators (prevalent in countries like Indonesia and Thailand) in India. Barring a few top fund houses which do fund accounting in-house, most fund houses have outsourced their back-office activities to custodians, who are outside the ambit of regulations as far as fund accounting and administration are concerned.

Domestic mutual funds may soon find themselves playing a bigger role in public shareholder activism. SEBI wants fund houses to play an active role in ensuring superior corporate governance of public listed companies in order to restore faith and protect the interest of investors.

SEBI plans to appoint a Committee to examine if service tax in mutual fund transactions should be borne by investors or mutual funds. While the market regulator does not want investors to bear additional costs, industry body AMFI has been lobbying that service tax should be separately charged to unit holders, as they are the beneficiaries of the service.

SEBI is also examining the issue of the number of investors that every mutual fund scheme should have in order to mitigate risks in case of a huge exodus. The regulator plans to increase the minimum number of investors in a scheme to 50, while reducing a single investor holding to 10-15% from 25% of the assets under management. It plans to extend this structure to a scheme’s sub-plan level (institutional and retail).

The Reserve Bank of India, in a move to curb mis-selling of financial products and ensure transparency, has asked banks to disclose to their customers details of the commissions and other fees received by them while selling mutual funds and insurance policies.

The RBI governor has expressed his concern about the exponential growth in bank’s investment in mutual funds. Banks have been parking in excess of Rs 1 lakh crore (Rs. 1.2 lakh crores on an average) in debt funds in the past few months, which sometimes circulates from mutual funds back to banks with only a portion of it flowing to the corporates. RBI wants banks to directly lend funds to corporates and not through mutual funds.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has proposed to the government to create a “Sovereign Fund”, proceeds of which are proposed to be utilized to rescue and arrest possible volatility in domestic capital market as also encourage its orderly growth for a stable and progressive financial system. Worldwide there has been tremendous debate to put in place an institutional mechanism having sovereign back up to strengthen and support the capital market shocks. The recent example is that of sovereign fund of Singapore and China. These funds have come handy during the huge panic selling in the domestic market to ward off unprecedented losses. Since the Indian capital market has grown tremendously with an average turnover scaling to Rs. 90,000 crore per day and contributing about Rs. 108 crore per day to the exchequer in the form of STT, a time has come when a quarter of which can be used for setting up of the proposed fund.

Dubai-based mutual funds are keen to tap the Indian market – directly market and sell mutual funds in India. Dubai Financial Services Authority (DFSA) has indicated to SEBI that it is interested in an arrangement wherein Dubai International Financial Centre region’s mutual funds can be directly marketed and sold in India. DFSA’s proposal might mean a paradigm shift in the policy regime in India as far as mutual fund regulations are concerned. But the recent Dubai debt crisis casts a cloud on this proposal. Besides, the unearthing of this crisis has rocked the Indian stock market…volatility is in the air…

Monday, November 23, 2009


(November 2009)

According to data by the Association of Mutual Funds in India, the mutual fund industry touched a historic high of Rs 7.62 lakh crore, while the country’s largest fund house, Reliance Mutual Fund, saw a decline of over Rs 1,400 crore in its average assets under management at the end of October 2009. The average AUM grew by Rs 19,391 crore, or 2.61 per cent, in October, which can mainly be attributed to the increased inflows in fixed income plans. With the equity markets turning volatile, fund managers have chosen to hold more cash in October. Total cash balances across equity mutual fund schemes increased 12% to Rs 15,100 crore (about 9% of the corpus) in October 2009.

Reliance Mutual Fund maintained its position as the country’s largest fund house despite a decline of Rs 1,469.51 crore in its AUM during the month. At the end of October, the AUM of Reliance Mutual Fund stood at Rs 116,781.92 crore. The assets of the country’s second-largest fund house, HDFC Mutual Fund, inched closer to the Rs 1 lakh crore-mark and stood at Rs 93,316.03 crore with the addition of Rs 2,888 crore during October. ICICI Prudential Mutual Fund added Rs 405.36 crore to its assets, while UTI Mutual Fund witnessed the biggest jump of Rs 3,258.55 crore in its AUM, next only to SBI Mutual Fund, which emerged the highest gainer in terms of monthly accretion with assets growing by about Rs 3,400 crore during October. With a sharp decline of 7 per cent in the Indian equities during October, there has been a decline in AUMs of many fund houses. Of the 36 fund houses, as many as 10 reported a decline in assets.

While the equity asset bases of top fund houses paint a rosy picture, much of it have been due to the appreciation in value of shares rather than fresh inflow of money. An industry update by mutual fund registrar Karvy estimates a net outflow of over Rs 2,500 crore from equity mutual fund schemes (managed by them) in October 2009. According to Karvy Computershare Mutual Fund Services (which services 25 of the 36 AMCs), fund categories like ELSS and balanced funds have seen large withdrawals during October. The outflow has been more significant in the case of retail investors (investments below Rs 1 lakh), with nearly a few thousand crores flowing out of these schemes in October. Trust-based investors, too, have withdrawn money from equity schemes during the quarter. While SIP money is still coming in, fresh inflows (into equity schemes) are not picking up in a big way. People are not comfortable investing in volatile markets. Though not a direct factor, distributors are not really pushing equity schemes to investors, as they do not earn them enough commission. As per AMFI data, equity scheme sales have nearly halved in three months time, after SEBI abolished entry loads with effect from August 1, 2009. Inflow of money is primarily from HNIs and other classes of affluent investors. Retail investors are withdrawing money from mutual funds to invest in PE funds and PMS schemes run by mutual funds. Top mutual funds are secretly recommending their investors to shift investments from schemes to PE and PMS schemes promising higher returns.

Solid funds continue to accumulate awards and accolades. Crisil's Composite Performance Rankings (CPR) for July-September 2009 period saw Reliance Mutual Fund emerging as the fund house with most number of CPR 1 ranks, repeating its first quarter performance. HDFC Mutual Fund showed an improvement by bagging seven CPR 1 ranks compared to six in previous quarter. ICICI Prudential Mutual Fund and UTI Mutual Fund followed with six CPR 1 ranks each, while Birla Sun Life Mutual Fund and DSP BlackRock Mutual Fund were other strong performers bagging five CPR 1 ranks each. Crisil CPR is the relative performance ranking of mutual fund schemes within the peer group. The rankings are assigned every quarter with 21 different peer groups such as large-cap equity funds, mid and small-cap equity funds, balanced funds and liquid funds. Crisil-CPR is assigned on a scale from 1 to 5, with the top rank of CPR 1 indicating 'very good performance'.

Birla Sun Life Tax Relief 96 has been adjudged 'the Worlds Best-Performing Equity Fund' for the 13-year period ended September 30, 2009. This recognition is based on the study of 3006 equity funds as per Lipper global fund data, excluding ETF and closed-ended funds, having a minimum track-record of at least 13 years as of September 2009.

Piquant Parade

Mahindra Finance plans to enter the mutual fund business. It has lodged an application with SEBI to launch an asset management company. The company hopes to provide mutual fund products to vast untapped rural market customers in the next 4-6 months period.

Reliance Mutual Fund has bought 1.18% stake in the leading financial services provider, Edelweiss Capital for an aggregate amount of Rs. 38.8 crores.

UTI AMC has shed 26% in favour of T. Rowe Price Group Inc., for approximately Rs. 650 crores, thereby, valuing the fund house at Rs. 2500 crores. The deal that was struck was valued at 3.3% of UTI’s AUM. Industry deals prior to this were concluded below this price line.

Close on the heels of its strategic tie-up with T Rowe Price, UTI is making a massive effort to shore up its overseas operations to a new level, focused on the Middle East, Europe, and the rest of Asia. Plans include new funds based in Luxembourg and Singapore, to add to its existing palette of focused, generic, and feeder funds, managing T Rowe Price's existing $2-billion investments in India, and a thrust into the private banking and wealth management arena. UTI holds the distinction of running the world's oldest offshore fund set up for foreign investors. India Fund, set up in 1986, is rated as one of the best performing India funds globally, according to industry tracker Morningstar. UTI is also one of the few Indian fund managers with a $30-million Shariah fund based in Kuwait, and over $600 million of assets under management overseas. UTI is a big name in India, but it is not known outside India. It is difficult to sell the UTI brand to big overseas investors. So, the T. Rowe Price tie-up gives them access to both an internationally-respected brand and a huge distribution network. UTI International, UTI AMC's overseas arm, listed in Guernsey and headquartered in London with offices in the Middle East and Singapore, will be the main vehicle for UTI's major thrust to increase its global presence. In Asia, UTI International already has a tie-up with Shinsei Bank. As of now, the focus is on the Middle East, where the bulk of the money is expected to come from. UTI International is not yet entering the US market, but is planning to manage any India-focused funds that T Rowe Price may launch in the US market. UTI International is betting on a Luxembourg fund to shore up its share of the European market, because it is a jurisdiction investors are comfortable with. Most of UTI International's current funds are Mauritius-based.

…to be continued

Monday, November 16, 2009

NFO Nest
(November 2009)

The unrelenting NFO slow down…

AMFI data reveals that a mere 58 NFOs (only 14 equity funds with a majority being income funds) have been launched in the past seven months (April-October 2009). The mutual fund industry mobilized Rs 14,181 cr in the past seven months in contrast to Rs 93,285 cr during the same period in 2008 – a massive fall of 85%. In September and October 2009 alone 30 NFOs were launched out of which 23 were income funds, 5 were diversified equity funds, 1 each were ELSS and liquid funds respectively. The fund houses chose to go in for income funds as against equity funds, inspite of the euphoric rise in the stock markets since March, 2009 in view of the prevalance of a low interest rate structure, thanks to the easy monetary policy adopted by the RBI. Debt securities are lucrative and reap rich rewards in a low interest regime. The tight October 2009 monetary policy has sought to reverse this trend.

Against the backdrop of a tough environment for equity collections, the recently concluded Religare PSU Equity Fund has turned in a decent performance with a reasonable collection of Rs 230 cr.

Stringent regulations – abolition of entry loads and insistence on uniqueness in NFOs - rolled out by the market regulator in the past few months could explain the appearance of a single fund once again in NFO Nest in November, 2009.

Axis Equity Fund
Opens: Nov 11, 2009
Closes: Dec 8, 2009

After Axis Liquid Fund and Axis Treasury Advantage Fund, the fledgling fund house has now come out with Axis Equity Fund. It is a diversified scheme for investing in Nifty stocks. The fund seeks long term capital appreciation from a diversified portfolio of stocks across the market capitalization spectrum. The fund will focus on growth companies with a sustainable model and follow a bottom up stock picking system. The fund has enabling provisions to be fully invested in derivatives, up to 40% in overseas financial markets through ADRs, GDRs, and debt and its own or other mutual funds. The fund is benchmarked against the S& P CNX Nifty.

Industry data indicates that in the last five years (as on October 30, 2009), diversified equity schemes have given positive returns with the worst giving 12% p.a. and the best giving 34% p.a. Having noticed the demand for simple yet trustworthy products that are total solutions, the fund house has come out with a generic product in the most effective category, Diversified Equity Funds. The fund house’s proprietary four-step investment process and the team of experienced equity professionals will aid risk mitigation, besides offering a potential answer to the long term solution that the investor is seeking.

ICICI Prudential Oil Fund, Birla Sunlife T-20 Fund, IDFC Real Estate Equity Fund, Mirae Asset Korea Discovery Fund, Canara Robeco Active Money Manager, Canara Robeco Gilt Short-term Fund, HDFC Medium term Opportunities Fund, Baroda Pioneer Infrastructure Fund, and Canara Robeco Large Cap+ Fund are expected to be launched in the coming months.

Monday, November 09, 2009

November 2009

Gem chase!

Tax planning is an exercise that needs to be evenly spread through out the financial year. April is the ideal time to start this much-needed exercise. November, though a tad better than March, is, no doubt, late…but better late than never…

With Birla Sun Life Tax Plan and Principal Personal Tax Saver Fund failing to consistently beat the category average, they have been shown the door. Principal Personal Tax Saver makes an exit after a brief stint of one year as a GEM. The effervescent Canara Robeco Tax Saver Fund has been accorded a red carpet welcome. All the other funds that figured in the November 2008 GEM GAZE have rightfully retained the status of a GEM in November 2009 too.

Magnum Taxgain Gem

Slow and steady…

It is the oldest and largest ELSS Fund launched in 1993 with assets worth Rs 4962 crores at present - almost 40% of the ELSS category. It is one of the best tax saving funds in the long-term with a good portfolio and a consistent track record. With returns of 36.25% over the past five years for the period ending September 30, 2009, it has been awarded the ICRA Mutual Funds Awards in 2009. The churn in management has not affected the consistency of returns. The current strategy is to take long term calls in stocks and sectors with a view to minimising volatility and risk in the fund. It has a decidedly large cap orientation with muted returns when the market is rising and limited downside when the going gets tough. In the bear hug of 2008 and the first quarter of 2009, the fund took refuge in debt and cash. While the fund fell with its peers in 2008, in the opening months of 2009, the fund stood head and shoulders above its category. Its timely shift to equity and its presence in the key sectors, namely, metals, finance, and engineering, enabled the fund to maintain the lead during the recent rally from March 9, 2009. It has broadened its portfolio from as low as 30 in 2006 to 89 in 2007 and 69 at present. The allocation to the top 10 holding has been brought down to an average of 32% over the past year as on August 2009. The fund’s expense ratio at 2.5 is marginally on the higher side. A radical transformation has been noticed in the fund in recent months with a pronounced tilt towards conservatism. Its long term record speaks volumes and makes it a worthy pick.

HDFC Tax Saver Gem

Daring duel…

Launched in December 1995, HDFC Tax Saver Fund, with an AUM of Rs 1947 crores, has performed handsomely over the longer term horizon, posting annualised returns of 19.23 per cent over the last five years. The fund has strong leanings towards mid-cap stocks (44 per cent of the total portfolio), particularly in sectors such as banking and engineering. The fund has been quite selective in its picks in which it invests with conviction. The number of stocks in the portfolio is restricted to a mere 20 or 25 though recently, it has touched 30, with the top five accounting for more than 30%. After taking advantage of the mid cap rally in the past two and a half years, the fund is back to its large cap tilt. It has a comparatively low expense ratio of 1.98. It has never been rated below four stars in its entire rating history. In 2009, the fund is up 27% as against 23% by its peers. It has a glorious history of beating its average peer by more than 10% barring a few lacklustre years.

Fidelity Tax Advantage Gem

On the fast track…

In its short life of three years it has accumulated awards and accolades…Fidelity Tax Advantage has won the CNBC TV 18 CRISIL Award for 2009 as well as the ICRA Seven Star Gold Award 2009, besides being rated as a 5 Star fund by Value Research. The fund has outperformed its benchmark, the BSE 200 for the one year, three years as well as since inception. It has turned in a promising performance with 25% in mid caps and 11% in small caps. 45% of the fund’s assets are invested in the top three sectors, namely, financial services, energy, and healthcare. Its expense ratio is relatively low at 2.18 with an AUM of Rs 1117 crores.

Sundaram BNP Paribas Tax Saver Gem

Driver with a drive…

It has proved its mettle time and again. While the returns have been consistent on an year to year basis, the returns cannot be termed astounding. It was, however, in 2008 when the global financial crisis reached a cresendo, that the fund gained an edge over its peers and its benchmark, the BSE 200 by exhibiting remarkable resilience. The fund cushioned its fall to about 48% as against a fall of 52% in the Sensex. The category average fall was a dismal 56%. The fund lagged its peers in the 2009 bull run, by clocking an average of 68% as against market returns of over 70%. It has exhibited a sterling performance record, thanks to its good portfolio/sector mix - a rewarding multi cap portfolio mix with 35% in mid caps and right moves at the right time. The fund has been highly skewed towards sectors such as financial services, energy, and FMCG, with the top three sectors constituting about 52 per cent of the fund's net assets. Flexibility is the key…Its adaptability is appealing. Its nimble asset allocation took the cash to almost 36% in 2008. The fund manager keeps moving in and out of cash. In September 2008, it was 28.75%, it was brought down to 8.84% in October only to raise it to 36.53% the following month. It averaged 24% in the three-month period ending March 2009. As the markets started its upward journey since March 9, 2009, the cash level slid to 6% and has been hovering at that level ever since. It is not uncommon to see it move in and out of different sectors in a short span of time. The fund manager is quick to capitalise on opportunities available in sectors or stocks. But rarely does the fund manager take an exposure exceeding 5% in a single stock. In fact, this ELSS fund has the highest Sharpe ratio among its peers, meaning, it delivers the highest returns per unit of risk taken. This versatile fund tries to look at the bigger investment picture. Its expense ratio of 2.06 is lower than the category average of 2.32. The fund has earned the Morningstar award for 2008 in the ELSS category. With a mere Rs 3.8 cr in 2001, the AUM at present is Rs 1213 cr. The fund’s AUM has been surging at a mind-boggling rate of nearly 300 times.

Canara Robeco Tax Saver In
Turbo charged…

The fund has come of age to emerge as the compelling option in the ELSS category on the back of robust returns. A year ago, this fund did not make it to our elite list of GEMs. However, a dramatic turnaround since 2007 has catapulted it to an enviable position with an impressive 22.86% (10.38% category average) in the past three years. It has consistently beaten the category average since 2006, thanks to its aggressive mid cap orientation. In 2008, when the market tumbled, it shed a mere 46.85% as against the category average of 55.67%. Some of the sectoral bets, especially construction, worked in favour of the fund. The fund has left behind the days when its top 10 holdings accounted for the entire portfolio (January 2001). With an average of 34 stocks since 2007 and the top 10 holdings accounting for around 43% of the portfolio (in line with the category average), the fund looks fairly diversified. This tiny Rs 67 crore fund has an expense ratio of 2.5.

The ELSS collections in the last quarter of the financial year 2008-2009 dipped by a whopping 73% when compared to the corresponding period in the last financial year. This was a direct consequence of the free fall of the stock market during the global economic crisis. Irrespective of market gyrations, a systematic investment in these ELSS GEMs will ensure effective and stress-free tax planning and wealth creation!

Monday, November 02, 2009

(November 2009)

ELSS on the march…

According to a study, if you remained invested in Sensex shares for any block of three years during the past 27 years, your average annual return would have been 26.95%. The potential of ELSS Funds to create long-term wealth has not escaped taxpayers’ notice. Ever since Section 80C removed the sub-limit of Rs 10,000 per year on tax saving funds four years ago, the category has grown exponentially. From 18 funds managing about Rs 900 crore in January 2005, it has grown to nearly 30 tax saving funds managing over Rs 15,000 crore today. The only other tax saving option, which has grown at such a scorching pace is insurance. There, too, growth has largely come from unit-linked insurance plans (ULIPs), which is more of a mutual fund than an insurance plan.

Brief grief

During the past year (October 2008 – October 2009), ELSS funds were in doldrums in the first half of the year in line with the dismal performance of the stock market, but bounced back in the latter half. ELSS Funds collected Rs 3,808 crore between January and March 2008. During the fourth quarter of 2008-09, they managed to mop up Rs 1,134 crore – representing a fall of 70.20%. In March 2009, fund houses collected Rs 547 crore, which was 73% lower than the Rs 2,071 crore raised in March 2008. The ELSS Funds have more than made up for the lacklustre performance by displaying a scintillating show in the second half of the year under consideration.

Attractive investment proposition

When you invest in ELSS, your money is locked for a period of three years (minimum). This acts as a blessing in disguise as tax saving funds generally yield high returns during a 3-year period. The common man is basically afraid of investing his money in equity shares as he is afraid of loosing money. But a look at the recent past shows that investors who have invested in ELSS funds have never lost out on their money. In fact, they have been the front runners in terms of returns to investors. A small illustration will clarify this. If you make an investment of Rs 1,00,000, then under section 80C this complete amount is deducted from your gross income for that particular year. If your annual income puts you in the highest tax paying zone, i.e 34%, then the investment of Rs 1,00,000 will ensure that you get an annual tax deduction of Rs, 34,000. So, logically speaking, you invest Rs 66,000 considering the deduction. Assuming that the mutual fund declares an annual dividend of 10% then your total return on Rs 66,000 is [(10,000/66000)* 100] = 15.15%. This particular dividend earned is also tax-free, thereby, enhancing profitability. Another profitable proposition out of this investment is that after a period of 3 years, the capital gain that you obtain out of the investment is also tax-free. This is what makes ELSS the most attractive investment for those who have the appetite for moderate risk. ELSS is considered to be the best tax saving mutual fund scheme in India.

One up on other savings schemes

If we travel backwards in time by five years, ELSS Funds have delivered an annualised return of not less than 12% on an average. This is much higher than the returns you get on other instruments under 80C, which offer an average return of 8 to 9% p.a.

When it comes to the lock-in period, ELSS scores high since its lock-in is a mere three years as against a minimum of five years in the case of the other 80C instruments.

The tax benefits are attractive – dividends are tax-free and when you sell the units after three years, you need not pay tax since there is no long-term capital gains tax on equity funds.

On the tax front, it outsmarts Fixed Deposits and National Savings Certificate. ELSS investments can be withdrawn after three years and there is no tax on profits. If you reinvest in the ELSS fund, you get tax exemption twice in six years compared to just once in case of NSCs and Fixed Deposits.

In terms of lock-in, returns, and regular income, it is one up on Public Provident Fund too. “Dividend Delight” is the correct synonym for ELSS Funds. They are known for showering dividends on investors. Considering the fact that investment amount is locked-in for three years, all ELSS Funds practise giving handsome dividends. ELSS investment is a great income generation tool.

The golden mean

However, ELSS funds invest in stocks and carry the same risk as any equity fund. The best way to invest in them is through monthly instalments called SIPs. They even out the ups and downs by averaging your cost of purchase over the long term. You can barely squeeze in two instalments before March 31. For instance, if you are planning to invest Rs 20,000 in ELSS funds for Section 80C benefits, invest Rs 10,000 right away and another Rs 10,000 a month later, just before the end of the financial year. For the period - January 1, 2008 to January 1, 2009 - possibly the worst phase of the current crisis, a systematic investment in an ELSS fund would have limited your losses to 34% as against the loss of nearly 50% suffered by the Sensex.

…blocked by an unexpected turn?

It is surprising that ELSS, the only all equity tax saving option open to investors, does not figure in the new tax code that will be taken up for discussion. What still defies understanding is whether that is by omission or design. It is highly sceptical that it is by omission since there are four aspects in all, out of which two are conspicuous by their absence. ELSS may cease to exist in its current form because if there is no 80C, there cannot be an 80C Fund (read ELSS Fund). The new tax code is not an amendment or revision, it is a replacement. It substitutes the existing tax system in the land. Apparently, it looks as if equity-linked savings scheme will not exist in its current form after the tax code comes into play.

ELSS is a very good instrument – cost-effective, well-regulated, and transparent. Its inclusion in the portfolio enhances the quality of the portfolio. A very strong case can be built by the Indian mutual fund industry in order to have it in a different form. The new Direct Taxes Code Bill might give rise to new tax-saving funds that are very long-term funds. Redemption might get linked to the retirement of an individual or his retirement age. A new product could evolve….the mutual fund industry will have to work harder and make its voice heard…