The Hindu Business Line : Tax-saving schemes -- Check cost before selection

IT's tax saving time again and mutual funds are looking at increased collections in their equity-linked savings schemes (ELSS). Nearly all the established players in the industry have their own ELSS, and with less than two months for the close of this fiscal, some of them have already started marketing them a bit more aggressively.

The tax-saving schemes, which offer benefits under Section 88 of the Income Tax Act, have their unique advantages and disadvantages, which investors must keep in mind before parting with their hard-earned resources. Briefly put, an investment up to Rs 10,000 here represents a tax rebate of 20 per cent, i.e. Rs 2,000.

Investments in the ELSS variety must stay locked in for three years. Such investments, therefore, can work for unitholders for a fairly long time — long enough for the NAVs to appreciate. This, of course, is not guaranteed as the performance of the schemes will ultimately depend on the market.

An ELSS will otherwise work like any other open-ended equity fund that seeks to generate capital appreciation for investors. Investors should compare the tax-saving funds with the other choices before them, including national savings certificate (NSC), public provident fund (PPF) and certain bonds issued by FIs such as ICICI and IDBI. It may be mentioned here that the lock-in is the lowest when compared to that in the case of PPF and NSC.

The schemes' past performance (which may not necessarily be sustained in future) should also be an important criterion for making the right choice. This is significant in the context of the availability of a number of competing tax-savers in the market. In their better days, some of them had also paid out dividends; in at least one case, the pay-out was as high as 300 per cent.

The assets under management in these ELSSs are of various sizes. Some of them are quite small, including a few in the Rs 5- 20 crore range. Most, however, try to diversify as widely as possible in a bid to spread their assets over a large number of sectors and consequently reduce risk.

It may be mentioned here that open-end ELSSs are of fairly recent origin. Till a few years ago MFs used to come out with only close-ended products. Therefore, there used to be one particular ELSS every year.

One may also approach one's preferred ELSS through the SIP (systematic investment plan) route. For the average investor, this could well be a helpful tool as it ensures the best use of the principles of `rupee cost averaging'. In most cases, however, one will be required to pay an entry load, ranging from one to two per cent.

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