Equity-linked tax planning funds have emerged on top amidst high-pitch volatility on the bourses. Armed with a relatively small corpus and heavy inflows earlier this year, tax-planning funds have stolen a march over other diversified equity funds for the one-year ended September 15, 2000. Among 13 open-end equity funds, which have posted returns in excess of 30 per cent, six are tax-planning funds. Add to it, the top four funds belong to the tax-planning category. Tax planning funds are clubbed with diversified equity funds since they also invest in a diversified basket of equities though they offer tax-breaks under section 88 and carry a three-year lock-in.
Every year, tax-planning funds attract inflows only in March since investors save before the end of a financial year. This year, the top performing tax-planning equity funds in the Value Research category of diversified equity funds had also doled out hefty dividends and attracted hefty investments. With the April crash coinciding with their burgeoning corpus, most tax-planning funds lost marginally compared to the heavy erosion in NAVs of most other equity funds. Add to it, these funds also had the advantage of liquidating their stocks at the peak of the rally in March to facilitate a dividend payout. Thus, these funds had a relatively high cash component, both pre and post dividend payout.
Take for instance, Zurich India Taxsaver from Zurich India Mutual Fund. The fund doled out a 300 per cent dividend in early April, when the ICE rally had started to crackle under a bear grip. With an attractive dividend of Rs 30 per unit, the fund witnessed heavy inflows and saw its corpus vault from a mere Rs 2.21 crore in 1999 to Rs 50 crore on March 31, 2000. With nearly 42 per cent of the assets in cash on March 31, the fund was able to withstand the slide in the equity market in April and lost a mere 8.65 per cent against an average fall of 23 per cent in the category of diversified equity funds. Two, the large cash component saw the fund consolidate its holding in good quality stocks at relatively low prices. Clearly, the cash component owing to a hefty dividend payout helped Zurich India Taxsaver survive the carnage on the bourses in April. With the fund holding its ground, it has given an impressive return of 74 per cent for the one year ended September 15, 2000 against the sector average of mere 17.47 per cent for a basket of 62 diversified equity funds. The Rs 43 crore fund is currently 14.5 per cent in cash and holds 17 stocks in a well spread out portfolio.
The case is no different with Kothari Pioneer Taxshield, which tops the diversified category in both one-year and year-to-date periods, with a whopping return of 182 per cent for the one-year ended September 15, 2000. With 80 per cent dividend in April, the fund's assets under management doubled to Rs 60 crore with 56 per cent of the assets in cash on April 30, 2000. No wonder, the fund lost only 4.48 per cent in April.
The huge inflows at the time of the crash, besides adding stability to their meagre existence, has powered them ahead of plain equity funds.