Tax-saving equity schemes fail to take off

Uncertainty over Direct Taxes Code and poor equity markets play spoilsport.

A worsening equity market scenario and confusion over the Direct Taxes Code (DTC) have impacted inflows in equity-linked-saving-schemes (ELSS) in the current financial year.

Fund managers say declining sales and net inflows in the ELSS category, which is in line with what's happening with the pure equity funds, may deepen in the last quarter of FY12. They have kept their fingers crossed to see how the fourth and final quarter pans out.
 

TAXING TIMES Implementation of Direct Taxes Code (DTC) keeps investors away from tax saving equity schemes
Weakening inflows and sales in equity linked savings schemes (ELSS) till November
Year	Sales	Net Inflows
FY10	1,290	195
FY11	1,427	-993
FY12	1,331	-468
All figures in Rscrore till November
Net inflows in ELSS over last five financial years
Year	Net Inflows

2006-074,453 2007-086,151 2008-092,968 2009-101,554 2010-11266 All figures in Rscrore
Source : Association of Mutual Funds in India

ELSS are mutual fund schemes covered under Section 80C, which means the money investor puts into these funds is reduced from the taxable income (up to a limit of Rs 1 lakh). Therefore, it helps reduce taxes. However, once DTC kicks in, tax benefits on ELSS will cease to exist.

Normally, the second half of every financial year witnesses rise of inflows in equity tax saving schemes. “However, this year, investors have confusion over DTC, which will take away the tax exemption once it is implemented,” says the chief marketing officer (CMO) of a bank-sponsored asset management company, who did not wish to be named.

Till November, not a single month could see sales of more than Rs 200 crore and net inflows failed to cross a mere Rs 50 crore mark. “We had anticipated that post-October flows would rise. But, November disappointed with net outflows and in December there was no visible rise in interest for ELSS,” the CMO explains.

Most of the tax saving equity schemes are in the red, with a negative return of as high as 17 per cent over the last one year. Only four schemes from fund houses, including Axis, ICICI Prudential, Canara Robeco and Franklin have been able to give returns between two and five per cent during the year.

The overall sentiments, adds chief executive officer of a medium-sized fund house, in the equities are worsening. “ELSS, too, could not keep themselves aloof. Forget taxes, investors sensed that in such markets they cannot even make any reasonable returns,” he says.

However, investors can still buy ELSS this year as DTC will only be enforced from April. One would get the Section 80C benefits in any ELSS investment made till March 2012. Post that, there is no clear strategy about how fund managers would deal with their existing tax planning funds.