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Taxing times for floundering tax saving schemes
July, 09th 2008

Sub Heading : These schemes have on an average fallen in excess of 41% in the last six months

If you are an investor in equity-linked saving schemes (ELSS), chances are you have lost more than index investors, even after considering the fact that you saved on taxes. That is because the net asset value (NAV) of most tax-saving schemes have actually fallen more than Sensex or Nifty, and even broader indices like the BSE-100 and BSE 200. The NAVs of these schemes have, on average, fallen in excess of 41% in the last six months, against a 35% fall in Sensex, 39% fall in the BSE 100 and 40% fall in the BSE 200.

Compared to tax-saving schemes, balanced funds have given negative returns of 31.6%, while diversified funds have fallen, on average, by 38.3%.

Experts believe these schemes have been hit the most, owing to their wider mid-cap focus and passive management style, which tend to impact the returns when the market corrects sharply. "Since the fund managers of these schemes are ensured funds that are blocked for a long-time horizon, they tend to focus more on mid-caps and small-caps. As a result, these schemes tend to under-perform the market when there is a sharp correction," said Dhirendra Kumar of Value Research Online.  He said investment over 3-5 years would stabilize the returns even for such schemes and, so, investors would get better yields over longer term owing to dual benefits. "We believe this is actually the right time to invest in tax-saving schemes, as they are available at discounted NAVs," he added.

However, analysts believe tax-saving plans are not meant only for usual tax benefits, but also for long-term savings with stable returns.

"The purpose of introducing tax-saving funds was to ensure that investors see mutual funds as saving instruments and not only an equity-linked investment avenue and, therefore, there is a lock-in period of three years," said an expert with one of the leading mutual fund houses. He, however, agreed that such a fall in the last six months could actually impact the investors' waiting period and could take longer to recover.

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