3 Year Magic of ELSS: India

Equity Linked Savings Schemes(ELSS) as a class was ushered in by budget for fiscal 1990-91 with provision to deduct a maximum of Rs 10,000 invested in a specifically designed Mutual Fund scheme from Income taxable under Sec 80CCB of Income Tax act 1961.The PSU Mutual Funds led by Unit Trust of India offered MEP 91, Canpep 91 from Canabank MF, Dhan 80 CCB (1) -Cum from LIC MF and Magnum Equity Linked Scheme '91 from SBI MF and PNB ELSS 91 from PNB MF were the pioneers in ELSS world.

MFs were to invest predominantly into equity normally 80% of its portfolio. In that respect, they as a class reflect diversified equity funds. Such schemes allowed deduction of investment amount maximum of Rs.10,000 under Sec 80 CCB of Income Tax Act 1961; after the lock-in period of 3 years, the investor can repurchase at whatever NAV of the scheme although the scheme had a maturity period of 10 years. When such repurchases were effected, the initial amount invested was considered as income of that year and taxed. The capital gains portion were also appropriately dealt with. Even if there was a capital loss, mandatory tax amount was deducted at source. That made investors learn that MF products could be risky.Fiscal 1991-92 also had the same features. Any dividends there upon continued to be for exemption under 80L of Income Tax Act 1961.

But from next fiscal, the story was re-written all over again by the govt moving the ELSS to Sec 88, thereby enabling tax rebate 20%. Investors having income more than Rs 5 lakhs were not permitted in this route. The UTI kept their winning sales series name Master Equity Plan and launched MEP93.

The underlying character of the product changed, but the name continued. This created irritations as investors in MEP91 expected same treatment in MEP 92 and 93 when they simultaneously repurchased these schemes after the lock-in-period. The Closed end schemes got notified every year as an asset class eligible for Tax rebate.

The total Collections in 1991-92 were Rs1995.50 crores which touched Rs. 100.60 crores in 1996-97 from all ELSS sold.The learning made law makers and MF industry wiser by 1998 to amend ELSS 1992 permitting MFs to launch Open ended variety. It had the following advantages:No launch expenses every year.All around the year they can sell &The investor can SIP the investment spread according to his salary. No year end pressures on the investor &No sales overdrive in February -March by MFs

UTI launched its ETSP as an Open ended Scheme. The section provided 10,000 for ELSS, 30,000 for Infrastructure bonds and an overall limit of 70,000 for other listed items under Sec 88.

In 2003, UTI MF clubbed all five of their MEPs into a separate scheme called MEPUS from MEP93 to MEP97 into one single scheme giving option to unitholders for exit. 95% conversions were procured and no fresh investor allowed in. This was a strategic decision by UTI MF as the mandatory lock-in-period has been over, they could enhance fund management by this kind of a consolidated move.

The stock market fluctuations affect the market value of ELSS investments. As on 31 March 2004, the AUM stood at Rs 1669 crores as against Rs. 3036 crores of 31 March 2000.

From 1 April 2005, sec 80 L which gave exemption for divdidends from units ceased to exist. And the ELSS got shunted to Sec 80 C from Sec 88 making it as a closed end affair. This was freeing the individual to decide where he wants to invest and how much, instead of Govt. deciding where the tax payer's money should be invested; But there was panic in the industry as the notification mentioned the effective date as the date of notification rather than 1 April in the case of ELSS. This meant that schemes in force from 1 April 2005 to date of notificateion ie.. 03 November 2005 may not be covered under the scheme. This was subsequently clarified that they also would be covered under the new scheme.By December 20, 2005 another clarification also came from Govt. that a MF can have one epen end scheme with prior approval of SEBI and in such cases the 'year' would be calculated from the date of purchase. This give the much awaited flexibitlity of SIP under an ELSS throughout the year.It provided clear cut instructions about eligible investments, limits on aggregate investments in each class of assets and stipulated a maximum time of 6 months from the date of closure of sales to achieve the eligible investment criteria. UTI turned in another series of ELSS called UTI Long Term Advantage Fund

The fiscal 2007-2008 saw clubbing of 5 year bank deposits also into the Sec 80C overall limit of 1,00,000 brought in fierce competition to some extent freezing the movement of funds from banks to mutual funds.The fiscal 2008-2009 ushered in payments for reverse mortgage into the same kitty of 1,00,000 increasing the choices further in this class.In the overall limit of Rs 1 ,00,000 ELSS clearely scores on maturity period over the 15 year PPF, 6 year NSC and 5 year bank deposits. One do not loose any growth prospects, if not re-purchased on the completion of 3 years lock-in-period in an OES. You can thus plan your entry as well as exit. Although they have fixed rates of interest and that are assured over the period, in the case of ELSS the returns are market related.The risk in the case of bank deposits are determined by the capital adequacy of the bank.

The AUM of ELSS has increased 3.8 times from 1727 crores in 2004-2005 to Rs 6589 crores in 2005-2006. Further to Rs.10,211 crores by 2006-2007 and Rs. 16020 crores as at 31 March 2008. That is almost 9.3 times growth in a span of 4 years.SBI MF, Franklin India MF, HDFC MF, UTI MF are formidable presence in this class. Reliance MF has made history in terms of AUM, but the performance is under testing as yet to complete 3 years. So far only three funds have crossed 1000 crores in AUM from this class apart from Reliance: They are SBI Magnum Tax Gain and HDFC Tax saver.

The product differentiation available under ELSS beyond the plain vanilla schemes are indexing and using quantitative methodology.Franklin India Index Tax Fund has not gained in AUM as other schemes of the fund. Lotus india AGILE Fund follows quant route to generate returns. Thematic funds emerged in the ELSS with Tata Infrastructure Tax Savings Fund. Growth & Income Distribution options have become the clear cut alternatives when the market started going down in 2009. The trend setter is Canara Robecco Mutual fund.

Frills are also avaialable with ELSS; DWS Tax Savings Fund and Reliance Tax Saver provide life insurance cover where as Birla Sun Life Tax Relief Fund and HSBC Tax Saver Fund give critical illness cover; Baroda Pioneer Equity Linked Savings Scheme offesr accidental death insurance cover.

Baroda Pioneer and HSBC recover premium as part of annual recurring expenses. DWS, Birla and Reliance meet it of own pocket, Birla and DWS insist on a medical certificate or a declaration of health.

What is important for the customer? overdiversofication, sectoral skewness?, frills? After all it is a Tax Saving Investment.