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Tax-saver schemes lag diversified funds
March, 17th 2010

It seems that taxsaving mutual fund schemes are on the verge of losing their unique selling point. Mutual fund advisers hardsell these schemes to prospective investors claiming that they have the potential to outperform other category of equity schemes especially diversified schemes.

Advisers are unlikely to make such claim this financial year-end , as an analysis of data shows that tax-saving schemes from leading mutual fund houses have been lagging their diversified counterparts in onethree- and five-year periods.

It is no longer a big secret that tax-saving schemes are not being able to live up to their reputation. Earlier, they used to beat diversified schemes in the long-term and even used to outperform them regularly in the short period, says an investment adviser, who doesn't want to be named. However, that doesn't seem the case anymore .

Hemant Rustagi, CEO, Wiseinvest, a wealth management firm, says: A pointto-point comparison of returns of tax-saving scheme and diversified schemes doesn't give you the complete picture . In fact, tax-saving schemes are more volatile than diversified schemes.''

A look at the performance of tax-saving schemes and diversified schemes in the same fund house reveal that tax-saving schemes have been lagging even in the short period of one year. Rustagi says the small and midcap stocks in the portfolio of tax schemes could be a reason for their underperformance .

Tax-saving schemes tend to bet more on these stocks because the fund manager has the time to realise their full value because of the mandatory lock-in period of three years. However , it doesn't seem to have paid off. Another reason for the underperformance of these schemes could be that they witness inflows typically towards the financial year end. Probably, they are not able to capitalise on the opportunities because of lack of inflows,'' says Rusgai.

A Balasubramanian, CEO, Birla Sun Life MF, says taxsaving schemes still has the potential to beat diversified schemes in the long term of five years and more. A pointto-point comparison could be misleading because sometimes the rally would led by large cap and followed by mid and small caps.

The picture may differ depending on when you are looking at performance ,'' he says. As long as the composition of the portfolio is fine and the volatility is not very high, a marginal underperformance shouldn't be a great concern,'' he added.

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