Tax plan funds catch retail investors' fancy

Tax planning mutual funds have come into their own as a compelling cocktail of savings and returns, surpassing larger rivals such as equity funds in asset growth rates over the past year and a half, fund watchers said. From a mere 6.84 billion rupees in assets managed by 20 funds in March 2005, equity linked savings schemes spurted to 53.54 billion rupees managed by 26 funds at the end of August 2006, data from mutual fund tracking firm Value Research showed.In 2006 alone, ELSS assets have so far risen nearly 70 percent, more than double the rate of diversified equity funds, which of course have a much larger base."These (ELSS) are evergreen funds," Ajay Bagga, chief investment officer at Lotus India Asset Management Co. Pvt. Ltd. which plans to launch a scheme in this category, told Reuters."Every year investors have to save tax and if funds generate good return and give steady dividends, they would keep getting money from them," he said.The major reason for the category's growing popularity among retail investors is a decision by the Indian government, in early 2005, to raise the investment limit in such funds eligible for tax breaks from 10,000 rupees to 100,000 rupees.In an economy expected to grow above 7 percent, where rising middle-class incomes translate to higher tax outflow, this concession meant easy savings through a high-returns investment option.Fund houses' collections gave further evidence by reaching 27.81 billion rupees in the first eight months of the current financial year, compared with 4.29 billion rupees in the same period last year.Tax-planning funds on an average have given about 13 percent returns this calendar year -- not far behind a 17 percent gain by diversified equity funds -- in addition to saving tax outgo."Performances have actually brought in money," N. Sethuram Iyer, chief investment officer of SBI Funds Management (Pvt.) Ltd. said.In the three-year period ending September 14, an average ELSS has gained 45.97 percent annually as compared to 46.31 percent returns in diversified equity fund, as per Value Research data.Magnum Taxgain gave 81.63 percent annualised return, compared with 75.83 percent gained by the top diversified equity fund during the period.The three-year lock-in stipulated by the authorities also keep money within a taxplan fund allowing it more freedom in investment, fund managers said."Turnover tends to be lower in these funds because the fund manager can let his ideas ride instead of facing near term redemption," Bagga said.Since March 2005, six new funds have been launched, while Lotus India and HSBC Asset Management (India) Pvt. Ltd. are planning to roll out theirs."Now investors are realising the value of close-ended three year product," Vikrant Gugnani, president of Reliance Capital Asset Management Ltd. told Reuters."We are very bullish on this category," Gugnani, whose 11.41-billion-rupee Reliance Tax Saver (ELSS) Fund is the largest tax-planning equity fund, added.