A start has been made by Kothari Pioneer mutual fund which is launching a sector-specific ELSS scheme (for the software sector, where capital gains have been maximum in recent times).

The rot can be seen from the numbers which speak for themselves. Nine schemes launched in 1995 had mobilised Rs 1,412 crore, but by 1998, collections have crashed to a mere Rs 24 crore.

The average mobilisation per scheme in ELSS has come down from Rs 289 crore per fund in 1992 to Rs 12.22 crore in 1997 and much abysmally low of Rs 6 crore in 1998. Even these figures are a distortion as UTI traditionally has a large chunk of this market.

The apathy stems from investors' disenchantment with the equity markets and the resultant shift in preference towards relatively saferinvestment avenues like PPF, Ulip and infrastructure bonds. Besides offering similar tax benefits, these instruments provide safety of capital and guaranteed returns.

The equity markets have lived through a three-year long trough and the year-end, when FIIs book profits, is a very good time to enter. But the dismal performance of existing schemes scares away the investors.

To attract investors one has to advertise and probably offer sops. In fact, point out fund managers, the hefty marketing cost required for advertising, marketing and selling this essentially retail product is very high. "It does not make economic sense to launch an ELSS product as there is a lock-in period of three years in which a lot of time, money, energy is spent on managing the fund. If the fund collects a good amount of money than it is worth the efforts. But, these days due to the measly collections funds are not launching ELSS this year as the mobilisations to marketing and advertising, trade-off, is not worth the efforts,"Alliance Capital AMC vice president Sandeep Dasgupta said.

The high initial and running costs create problems. Almost every ELSS scheme charges full 6 per cent initial load and 3 per cent recurring expenses to the scheme, as allowed by Sebi guidelines. The result: even if a stock portfolio did not diminish in value over the last three years, expenses ate away 15 per cent of the worth of these funds. On top of that is an exit load of 5 per cent resulting in total erosion of Rs 2 per unit. Does this mean that the ELSS schemes have no future? Should they be done away with? The answer is not simple.

The mutual funds do not have be blamed for this altogether. The regulations require a new scheme to be launched every year because the close-ended schemes need to be repeated to provide annual tax-saving avenues. Floating a new scheme every year means incurring expenses which have to be recovered from the unitholder. A common expense is free insurance cover in case of death due to accident.

A number of mutualfund experts feel that the scenario can be changed. The industry's long-standing demand is to make these schemes open-ended. Experts say that an open-ended structure would save cost of launching a scheme annually besides allowing investors to invest small amounts at various points. In addition, fund managers who get constant inflows into the same scheme would have flexibility of management in deployment of funds.

There are relatively minor structural issues as well. One fund manager suggests that Sebi guidelines of keeping these schemes open from January to March should be done away with. "The money without fail comes into the scheme during the last week of March so opening the scheme only for March would reduce expenditure," a fund manager said.

One fund manager goes further to say that payroll subscription to these schemes can check the dwindle interest and could facilitate regular investment into ELSS.

Another feature that may revive the investors interest would be to allow unitholders to exitduring the lock-in-period, as in UTIs Ulip and LIC policies by writing back the tax exemption enjoyed.

Another suggestion put forward is to allow benefits of section 54EA and 54EB into ELSS schemes which can be brought in without any modifications. "This can be done with a stipulation that the lock-in period of 3 years or 7 years has to be maintained. This will mean that another category of investors can be roped in when the market is already very small," LIC Mutual Fund CEO RG Sharma said.

This step would prove to be helpful to both the investor as well as the mutual fund. To the investor, the benefits would be that he could keep on saving his money with the mutual fund in any of its open-ended schemes, whether income, balanced or growth, till March 31, of the relevant financial year, earning returns till that date and then switch over to the growth fund on the last date of the financial year or at the time that he thinks appropriate. Units so received would be locked in for a period of 3 years in thesame way as under Sec 54 EA & EB.

However, the bottomline is that the mutual fund industry has to improve the performance of the existing schemes to capture the faith of disillusioned clientele.