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Tax sops do it for ELSS
March, 19th 2009

EQUITIES may have lost the flavour with the market and so have equity diversified mutual fund schemes. However, thanks to the income-tax incentives, equity-linked savings schemes (ELSS) have still not lost their flavour completely with investors. It is, in fact, interesting to note that of late, net inflows into the ELSS category of funds have exceeded the inflow into the equity-diversified category. This is despite the fact that the number of schemes under the equity-diversified category outnumbers those of the ELSS category by a huge margin.

There is no denying that the market slump has hampered the growth of equity diversified schemes to a large extent over the past six to eight months. However, an ETIG analysis of the monthly inflows under the various categories of equity funds since March 2006 reveals that the inflows into ELSS have always been much more consistent vis--vis the equity diversified schemes. While ELSS has not seen extremely heavy influx of cash in any given month during this period, it has also not witnessed negative inflows (net outflow) for any of the 35 months till date.

Diversified equity schemes, on the other hand, have been a highly volatile category of funds where inflows in certain months have crossed five digits, while in some others they are into the negative terrain.

This stability in ELSS category may well be attributed to the structure of these schemes. Though both categories of funds have similar investment strategies, benchmarks and objectives, the three-year lock-in period tagged to ELSS category restricts investors from an early exit.

Moreover, since the initial investments into these schemes are entitled to tax benefits under the 80C basket limit of Rs 1 lakh, it is difficult for the investors to discontinue their monthly systematic investment plans (SIPs) from such schemes in a jiffy. Infact, March usually witness a very heavy influx of cash into these schemes. So much so that the net collections in March alone are thrice the collections of any other month. As March is back, it would be interesting to watch whether ELSS is able to maintain its year-long trend this year.

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