Tax sops: Make the most of ELSS

Assets

The apprehension of losing tax benefits as well as volatile equity markets had a negative impact on the fund flows of ELSS. Over the last one-year,there has not been any significant growth in the assets of tax-saving funds. The assets have grown marginally by 0.18 per cent to Rs 24,914 crore as on June 2011 from Rs 24,868 crores as on March 2011. Dhruva Chaterji,Senior Research Analyst,Morningstar-India,says,One of the reasons is the continuous net outflow of funds from the category,except in the months (say from December – March) when tax-planning season is at its peak. Also,volatility in the equity markets,especially in the months of January and February last year when the markets fell by around 10 per cent and 3 per cent respectively,took a heavy toll on the categorys assets. This was despite the category witnessing net inflows in both these months.

Portfolio

Most of the tax-saving funds are predominantly invested in large-cap stocks,with little exposure to mid- and small-cap stocks. Financial services,consumer goods,industrial materials,software,energy and healthcare are the top sectors in the portfolios of tax-saving funds. Most of these sectors such as financial services,consumer goods,healthcare and software have done well in the year ending June 30,2011. Sectors such as energy and power have performed poorly during this period.

Performance

ELSS provide flexibility of equity exposure along with tax savings. The returns of some of the funds like HDFC Tax Saver has been over 30 per cent (since launch). Suresh Sadagopan,CEO,Ladder7 Financial Advisories says,There is no other financial instrument that gives tax benefit along with superb returns,is low cost and has a lock-in period of only three years. HDFC Tax Saver,Fidelity Tax Advantage and Sahara Taxgain were among the top performing funds over both three-year and five-year period.

Future

If the DTC goes through in its present format then ELSS funds would lose their purpose as without tax benefit they are not likely to attract any inflows from the investors. The only comparable product that would provide equity exposure along with tax benefit is the New Pension Scheme (NPS). But with a long lock-in period,NPS is in a different category of its own and is still to prove itself as a financial product that can provide comparable returns. The option before the fund houses is limited. Either they can merge the existing equity linked tax saving schemes with other equity funds or restructure and rename them as a normal equity schemes. Dhirendra Kumar,CEO,Value Research says,Before three years (from March 31,2012),the fund houses cannot change the scheme and only after that can it convert to a normal equity fund. In case these schemes are merged with other funds,the Net Asset Value (NAV) will be decided on the conversion ratio taking into account the NAVs of both the funds. The scheme to be merged is redeemed at the market price and a new fund is bought with that money at that particular equity funds prevailing NAV,added Kumar.

The main dilemma asset management companies would face is who will bear the securities transaction tax (STT) which amounts to about 0.25 per cent. This has prevented several fund houses from merging their non-performing schemes with the performing ones in the past. Although,with the ELSS set to lose its tax saver status,fund houses have little choice. The tax benefit on investments made up to March 31,2012 still exists. Experts advise investors to take full benefit of this opportunity before it is taken away by the government next year.

ritukant.ojhaexpressindia.com