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Tax glitches take sheen off MF plans
Nimesh Shah & Nikhil Lohade in Mumbai | May 31, 2004 12:38 IST
Equity-linked saving schemes are finding few takers as investors move to more tax efficient schemes. Mutual fund houses have not bothered to market these plans aggressively either.
ELSS was launched with the objective of attracting small savers to the capital markets. Since the first plan in 1991, total asset under management of such schemes have languished, falling to Rs 1,669 crore (Rs 16.69 billion) as on March 31, 2004, as against Rs 3,036 crore (Rs 30.36 billion) on March 31, 2000.
Equity-related growth schemes have witnessed huge inflows in the last one year due to the boom in the equity markets.
The AUM of various equity-based schemes has grown from Rs 9,000 crore (Rs 90 billion) in 2003 to Rs 23,000 crore (Rs 230 billion) in 2004, while the total AUM of 43 ELSS schemes grew from Rs 1,228 crore (Rs 12.28 billion) to Rs 1,669 crore during the same period.
A P Kurian, chairman, Association of Mutual Funds in India, said, "These products lack exclusivity, in the sense that there are other investment products available in the market that offer similar tax exemptions. For ELSS to succeed, the scheme must be reworked and greater tax sops must be offered."
He added that AMFI will be submitting a proposal next week to the finance ministry to rework the scheme.
Industry observers said the lack of interest among retail investors to lock-in their investment for three years and availability of other tax saving schemes in the last few years have taken the sheen off ELSS.
"Lack of strong inflows into various ELSS proves that retail investors are taking a short-term view for the equity markets and are looking at immediate gains," said a fund manager with a domestic mutual fund.
Ashutosh Bishnoi, chief marketing officer, UTI Mutual Fund, said, "Investors now have other options for tax planning instruments and with dividends from equity schemes tax-free in the hands of investors, they are opting for other diversified schemes which can fetch them better tax benefits. Also, investors above the Rs 5 lakh income category is not getting into the ELSS schemes as they are not eligible for the Section 88 benefit."
UTI, after merging its ELSS schemes under one scheme called MEPUS, currently manages around Rs 890 crore (Rs billion). From 1993, investments in an ELSS became eligible for tax exemption under Section 88 of the Income Tax Act 1961.
Analysts said mutual funds should also be blamed for the failure of the ELSS scheme as they have failed to develop the equity cult among investors by encouraging them to remain invested in the market for a longer lock-in period of three years.
A senior marketing executive at a foreign mutual fund said, "Equity fund divided has become tax-free at the hands of investors, so they are looking at other diversified schemes with higher returns as the tax benefit in the ELSS scheme is restricted to just Rs 10,000. Also, the lock-in period of three years in ELSS has resulted in investors shying away from such schemes."