For now, distributors pushing insurance products instead.
In spite of the tax-saving season being round the corner, inflows into tax-saving funds or ELSS (equity linked saving schemes) of mutual funds have hit a five-year low.
These funds collected only Rs 578 crore since April last year, according to the Association of Mutual Funds in India. This compares with Rs 2,137 crore raised during the same period of 2008-09, when stock markets were in a bearish phase.
An ELSS works like a diversified equity fund, investing in equity with a three-year lock-in. Under section 80C of the tax laws, one can claim a deduction of up to Rs one lakh by investing in these schemes, making it one of the most tax-efficient products.
Inflows Into ELSS Schemes:
in Rs cr
|2005 - 2006||1,781|
|2006 - 2007||2,200|
|2008 - 2009||2,137|
|2009 - 2010||578|
“Investors have become very sceptical about markets. Moreover, a majority of the tax planning pie is going towards insurance, which is why we have been seeing minuscule inflows in these schemes. A lot of people wait for dividends announced by these funds as arbitrage opportunity. The net investment which an investor makes for these funds gets reduced because of dividends. The sentiment is expected to pick up in February, March,” said Rupesh Nagda, Head of Products at Alchemy Wealth Management.
Although the Sensex has doubled to 16,000 in the past one year, this has not resulted in equal optimism for equity as an asset class. ELSS funds, which invest mainly in equities, have borne the brunt of investor apathy. Many investors are not comfortable with the sharp up-move in benchmark indices, having burnt their fingers during the crash of 2008.
Hence, a lot of them are preferring traditional tax-saving instruments, such as PPF (Public Provident Fund), NSC (National Savings Certificate) and bank fixed deposits. While these products offer lower returns, the risk is much less than with an ELSS. With the overall risk appetite for equities among retail investors having gone down, they are considering it safer to invest in these instruments, even with lower returns.
Experts said a severe setback to these funds has come from unit-linked insurance plans (Ulips) and other insurance products. The renewal premium collection for the life insurance industry increased to Rs 96,917 crore between April-December 2009 from Rs 79,168 crore a year earlier, an increase of 22 per cent. In case of ulips, the renewal premium increased by 41 per cent to Rs 37,543 crore from Rs 26,638 crore.
“The general mood in equity markets is not buoyant at the moment. The markets have been going through extreme volatility in the last few months. And, considering that ELSS investors are mostly risk-averse, they would not like to participate at this time. The flavour of the season has certainly been insurance and government-sponsored fixed deposit schemes, as the level of safety is much higher,” said Kaustav Majumdar, Deputy CEO, SMC Sanlam Wealth Management.
Another reason for the lagging inflows in ELSS schemes is the new commission structure put in place by the Securities and Exchange Board of India, wherein distributors get only 0.5-0.8 per cent on mutual fund investments. This is nothing in comparison to insurance, where commissions are as high as 70 per cent in some cases.
“Insurance is getting a major portion of the total tax-saving pie. ELSS funds have suffered because of the underlying dynamics of distributor remuneration being changed. Having said that, the appetite for equity has been quite poor in the past few months, to which ELSS is no exception. But, we have seen an uptrend in the last 10 days”, said R S Srinivas Jain, chief marketing officer at SBI Mutual Fund.