Equity-linked schemes lose sheen

MUMBAI: The last minute scramble to save income tax is on. However, this time people seem to be more concerned about protection of their capital

and assured returns, says investment advisors.

Among the class of investments permitted under section 80 C, equity linked savings scheme (ELSS, also know as tax saving schemes) from mutual funds (MFs) seems to be the least favourite of individual investors.

Tax saving schemes were a hit with yuppie investors when the market was on a bull run. ‘‘The severe underperformance of these schemes is one of the reasons why many investors are not keen on investing in them. They are lagging (behind) diversified equity schemes by over 10%,'' said an MF agent who didn't want to be named.

For instance, according to Valueresearch, an independent MF tracking firm, the top performing ELSS has given -44% in the last one year, whereas its counterpart in the diversified category posted -32% in the same period. ‘‘Considering that we are talking about negative returns, it may be really pinching people badly. Especially, people who have entered the market in the last three to four years,'' adds the agent.

‘‘This is happening because of lack of proper education. When an advisor talks about 20% return from stocks, he has to explain to his clients that he is referring to average return. That includes, a year when the investment doubles and another where there is a negative return,'' says Mukesh Dedhia, director, Ghalla & Bhalsali Securities, a wealth management scheme.

That is why he still roots for tax saving schemes. ‘‘The open-ended diversified schemes are doing better because they are sitting on cash. This is because the fund manager has to keep money to meet redemption in an open ended scheme,'' he explains. ‘‘However, since tax saving schemes have a 3-year lock-in period, the fund manager typically tends to pick up stocks in the small and mid category, which could perform better in the future. That is why these schemes are under performing,'' he adds.

Investment experts also ask investors to take note of the difference between ELSS and other investment options

(See: table) permitted under section 80 D. ‘‘Most investments under section 80 C offers fixed rate and they are safer. But you can hope to get a tax free income of 8% from them,'' says an MF manager. ‘‘ELSS has the potential to deliver you better returns, provided you have the stomach for higher risk. This is because stocks, though highly risky, have the potential to beat all other investments in the long run.''

For example, Valuereasesch data shows that ELSS as a category has returned around 11.91% in the past five years, only marginally lower than diversified schemes which gave around 12.24% in the same period.