Equity Linked Saving Schemes (ELSS) are mutual fund schemes targeted at tax-paying investors. In 1992, the government announced ELSS to encourage participation from middle class investors in the equity market. Under this scheme, investment of Rs 500 and above and in multiples thereof, but with a maximum limit of Rs 10,000, made by individuals and HUFs, are entitled to tax rebate of 20 per cent of the investment made. For instance, if tax liability of an investor is Rs 3000 and he invests Rs 5000 in an ELSS, 20 per cent of Rs 5000 or Rs 1000 would be reduced from his tax liability, thus bringing it down to Rs 2000.

ELSS schemes are pure equity schemes and have a fixed tenure often years. This investment will be locked in for a period of 3 years - thus it can be redeemed or sold in the stock market only after three years.

The Numbers

Over the past few years, collections under ELSS have dwindled. With poor performance from preceding years' tax-savers, investors have shifted preference to fixed-return, tax-saving avenues like PPF or the NSS.

1995 was a golden year for tax-saving schemes when ten tax plans were launched including two from private sector AMCs and investors pumped in Rs 1450 crore with MEP getting the lions share of Rs 1150 crore. Propelled by the super success of 1995, a record fourteen funds were launched in 1996.

But this time, investors were decisive about there distrust in these schemes and the collections were barely Rs 365 crore, just about a quarter of the previous year's mobilization.

In subsequent years, both the number of launches as well as the mobilisation have dropped further. So far, this year has been the worst in terms of number ofproposed launches. Till now, only two AMCs - Kothari Pioneer and UTI have indicated to launch their tax-planning product. However, even these schemes are unlikely to fare too well.

Leave alone the mobilization figures, what is actually alarming is that there has been a net outflow of money from this segment. The exodus from the funds on account of repurchases has far outpaced the inflow on account of new launches in the past three years.

For instance, consider the tax-planning funds of UTI - master equity plans. While MEP 1998 garnered Rs 21 crore, UTI faced an outflow of Rs 535 crore on account of repurchases in the previous MEPs. With one additional MEP opening for repurchase every year on one hand and drastically declining mobilization in new MEPs on the other, the ELSS contribution is likely to become insignificant in the Trust's corpus.

Other AMCs are in poor plight. Public sector AMCs have already abandoned the idea of launching tax plans. But for UTI, all the tax plans for 1998 were from theprivate sector.

Performance

One, the slide in the equity markets since 1994 has taken its toll on the ELSS and investors have not gained much from these tax saving investments. But can markets be solely blamed for the poor performance of these schemes. Definitely not. A glance at the performance figures proves the point. Over a longer time frame of 3 years and five years, the average return on these funds has not even matched those of the indices.

In the past three years, tax planning schemes have posted an annualized average return of -9.44 per cent while the Sensex has been much better off, depreciating 2.99 per cent annually. Effectively, this translates into a relative underperformance of 7.35 per cent by these schemes. And in the past five years, the average of tax plans has been down 6.66 per cent while the BSE Sensex is down 2.76 per cent on an annualized basis.

The funds launched in 1994 have been the worst performers. Considering the fact that the market was at its all time high then,it is but natural that funds were hurt by the timing of launch. Over four years since launch, the NAVs of most of the schemes launched during this year are languishing below par.

The tax planning schemes launched by the private sector AMCs have put up a good show till now. For instance, Alliance Capital Tax Relief has appreciated 39 per cent in the past one year when the Sensex plunged 21 per cent. Besides, Tata Tax saving plan '96 has appreciated 34 per cent and Centurion tax saver '96 nearly 30 per cent during the period while the best performing public sector tax plan- MEP '96 depreciated 7.28 per cent.

Kothari Pioneer Taxshields have consistently registered handsome gains. The maiden taxplans of Birla Mutual Fund and First India AMC, Birla Tax plan '98 and First India Taxgain, respectively also deserve special mention. One thing is evident - the unsatisfactory performance of funds can not be solely attributed to turbulent markets.

There are a good number of funds which have given decent returns andproved their worth. There are also atrocious ones. The widening variance in returns clearly reflect the potential to beat the market by prudent fund management.

In a market like ours which is still not fully mature, fund managers play a decisive role in determining performance. Funds can flourish or perish. Some private sector fund managers have shown spectacular results but this has been accomplished on a small capital base and hence a large part of the investing community has not benefited from the same. If only the better performing fund managers are entrusted with more investible funds, this segment can regain the lost ground.

However, that may not be sufficient. The investors perception about ELSS and the objective of such an investment must undergo a fundamental change. The treatment of fixed return products like PPF and a growth product like ELSS in the same tax basket is not justified as investors benchmark returns from ELSS schemes against other products. In comparison, the NSC, with its 6 yearlock in period, offers a fixed return of 12 per cent per annum with no capital gains potential and the interest earned over Rs 12000 is taxed while an investment in PPF account also earns a fixed return of 12 per cent and tax free interest.

On the other hand, the ELSS series exhibit high volatility when compared to other risk free products and lower returns on an average than other section 88 products in subdued markets. Investors must realise that ELSS schemes are not merely to avail a tax rebate. These are equity based investments and have the potential to provide best returns over long term. However, volatility cannot be avoided.

And if the objective is regular return and the time span set for investment is less than 5 years, these instruments should be avoided.

Revival Plan

In order to make ELSS schemes attractive, existing tax saving schemes can be made open-ended through a simple amendment to the structure of the scheme. Such a product will be available throughout the year at NAV relatedprices. This will ensure several advantages. Investors can choose to invest at anytime of the year, or bunch investments in March as many do. The marketing rush in January-March every year may reduce. There will also be an additional benefit of averaging for a disciplined investor, who may choose to invest a certain sum of money every month in the scheme.

-- Value Research