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Investors Eye Losses on Tax-Savers

People hardly imagined they would lose money by investing in these funds, but that is what happened

So, you needed a tax-break to save some money that would otherwise have been swallowed by the taxman. Tax-saving funds, or equity-linked savings schemes (ELSS) were touted as some of the better options available in a market flooded with various products like National Savings Certificates (NSC), Public Provident Fund (PPF),. Kisan Vikas Patra (KVP), Post Office Scheme (POS), Postal Life Insurance and others.

While all of these looked tacky, in spite of being the best forms of saving tax, people were prone to fall to the glitzy charm of mutual funds, not that there was anything wrong with their products, ostensibly.

But then came the global financial crisis and all its related aftershocks, especially on equity.

Unlike investments in other equity funds, investment in ELSS are like forced savings, tax-payers invest in it only to take shelter under a legal option that would prevent paying higher taxes. The number of like-minded people was enough for mutual funds running these schemes to run up a huge collection (Check Table).

But how could anybody have guessed, or even expected, that the money invested in these funds would cost them more than the sum that would have been taken away by the taxman? And yet, that is what exactly what is happening to investors’ money.

But now, they have no options open to them. They are effectively locked-in for a 3-year period -- they are stuck with their choice of funds since they cannot withdraw their investment before the maturity duration. Hence, they need to wait for 3 years, to at least get back their initial investment amount – this applies to investors who have jumped into the ELSS option over the last year.

Judging by the number of queries we have received in the past one year, counted amongst the worst-ever for investors, we found many have put in their savings when the markets were at their peak, meaning they bought into stocks that were already overpriced. This is a very common mistake made by retail investors – they jump into the markets with their money when they have seen markets rise over the recent weeks, but they don’t realize that by then the market rally may be at the fag end of its strength and then comes the correction that leads to stock prices plummeting.

In 2008, the tax-saving category on an average was down by 56 per cent with the worst being down 66 per cent and the best being down by 47 per cent. In 2009 with the markets bouncing back into the frame again, tax-saving funds are, on an average up by a handsome 49 per cent. Sounds wonderful, doesn’t it! Almost near the break-even mark.

Well, not quite. You see, if you invested Rs 10,000 in the ELSS category at the beginning of last year (January 1, 2008), your investment at the end year (December 2008) would have fallen down to Rs 4,400. With the markets recovering in 2009, leading to a gain of  49 per cent for this category, it doesn’t really leave much room for celebrations --. 49 per cent of Rs 4,400 or Rs 6,556. So, your initial investment of Rs 10,000 is worth Rs 6,556 only.


Staring at Losses
SchemeName    Current Value of the Investment of Rs 10,000
Principal Tax Savings   4683
Fortis Tax Advantage Plan   4801
Escorts Tax Plan   5274
ING Tax Savings   5498
DWS Tax Saving   5849
Kotak Tax Saver   5999
Birla Sun Life Tax Relief 96   6017
DSPBR Tax Saver   6211
Baroda Pioneer ELSS 96   6379
LICMF Tax Plan   6397
Birla Sun Life Tax Plan   6450
UTI Equity Tax Savings   6482
Tata Tax Saving   6582
DBS Chola Tax Saver   6638
ICICI Prudential Tax Plan   6726
Magnum Taxgain   6927
Reliance Tax Saver   6961
HSBC Tax Saver Equity   6978
Religare Tax Plan   6999
HDFC LT Advantage   7025
HDFC Taxsaver   7166
Franklin India Taxshield   7355
Fidelity Tax Advantage   7375
Franklin India Index Tax   7413
Sundaram BNP Paribas Taxsaver   7527
Taurus Tax Shield   7669
Sahara Tax Gain   7692
Canara Robeco Equity Tax Saver   8127
Investment date is January 1, 2008
Value Date is June 4, 2009

Even worse, if you are thinking of a party, then better postpone it well into the future, because you are unlikely to get back your money’s value. The category needs to turn in another gain of 52.53 per cent more during the rest of the year just to break even.

That would mean the return of the category would need to be 127 per cent for 2009, surely a tall task for some of the funds in the category.

So, what are your chances of effecting a recovery? While a majority of these funds have never in their history given this high a return in a one-year period, those that have logged gains higher than this, have not done so recently at all, in fact you will have to take a long walk back into history to find them -- it was mostly at the end of 1999 and that too due to the information technology rally.

The returns these funds have to generate are astronomical indeed. Taking just one example, Fortis Tax Advantage Plan will have to turn in a gain of 193.26 per cent in the year to just break-even, forget return on investment -- its historic one-year best performance has been 65.82 per cent.

For the investors in these funds, it would be a big deal even if they get back their principal intact after 3 years.