If you've been a faithful mutual fund investor for the past year, the new fiscal must have come as a shock. As the market nosedived, the NAVs (net asset value or the total value of all assets divided by the number of units) of most mutual funds followed suit.
But if you are still the kind of investor who prefers the safety of the mutual fund to the risky excitement of investing in individual companies, take heart. Some mutual funds did survive the meltdown, and better still, actually outperformed the market. These are the tax saving mutual fund schemes.
KP Taxshield, an open-ended tax saving scheme from Kothari Pioneer, is a prime example of this trend. Over the six-month period, beginning November 1999 and ending April 2000, the BSE Sensex went up from 4,491 on November 2, 1999 to 5,924 on February 14, 2000 and then fell to 4,658 on April 28, 2000.
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In the first phase, when the Sensex went up by 31.9 per cent from 4,491 to 5,924 the NAV of KP Taxshield soared by more than 160 per cent from Rs 12.96 to Rs 33.75. But when the sensex fell by 21.4 per cent from its peak of 5,924 to 4,658 the NAV of KP Tax Shield fell by only 11.5 per cent to Rs 29.85. Clearly, the scheme had outperformed the market both in the bull phase and bear phase.
This is also true of several other tax saving schemes like Alliance Tax relief `96 and Zurich India Tax Saver `96. Compare this with the performance of some high profile, non-tax saving schemes like Birla Advantage which saw its NAV slump from a high of Rs 80.81 on February 14, 2000 to Rs 54.54 on April 28, 2000 _ a fall of over 32 per cent.
Tax saving mutual funds have been stayers mostly because they have been able to outperform other mutual funds is that any investment in these schemes is locked in for a period of three years. Says Jayaprakash K of Kothari Pioneer, "In view of the fact that the money is retail in nature and is available to the fund manager for a longer period of time, the fund manager is able to take a long-term view while picking stocks and building the portfolio."
Moreover, the new tax saving schemes are mostly open-ended schemes into which one can invest any time but can withdraw only after a three year period. So even if inflows keep coming into open-ended funds, the fund manager has a clear idea about the payouts, as the lock-in is reckoned from the date an investor gets into the fund.
Also, unlike the normal funds, which faced year-end redemption pressure, tax savings schemes witnessed net inflows in March 2000 with investments being made for tax saving purpose. This had a definite impact on the performance of tax saving schemes, as in a falling market, while others were facing redemption pressure, tax saving schemes were getting inflows which further helped them pick up bargians.
Another possible reason for the tax savings funds outperforming their more illustrious peers is their relative small size. For instance, schemes like Kothari Pioneer Tax Shield and Zurich India Taxsaver have corpuses as low as Rs 30 crore and Rs 50 crore, respectively. Even at the upper end of the spectrum, Magnum Taxgain, launched in 1993, has a corpus of Rs 188 crore. Compare that to normal open-ended equity funds, say, Birla Advantage or Mastergain at Rs 889 crore and Rs 1,925 crore, respectively.
Such large funds have a limited ability to churn their portfolio quickly and respond to the market. "Being smaller, these funds are much lean," points out Anil Sahgal of Dundee Mutual Funds. Which means that while diversifying its portfolio too, a small fund can play with quality stocks alone, whereas a big might stray into second-rung stocks.
Considering these aspects, one would expect investors to flock to tax saving schemes. But, contrary to that, these schemes suffer from lack of awareness and the fact that they are perceived and at times, even marketed as purely tax saving schemes.
"Tax schemes are just like any other equity scheme except for the three year lock-in, which unfortunately makes it less attractive to some investors due to liquidity reasons," points out Jayaprakash.
But this liquidity only provides comfort to the investor to redeem his units any time. It has been found that on an average, an investor remains invested in an open-ended equity scheme for at least two years. Considering that, a three year lock-in period is hardly an inconvenience.
And if an investor is too worried about locking in his money, he can opt for a dividend option and get a sizeable sum back as most of these schemes have declared high dividends _ 80 per cent for KP Taxshield. These dividends are tax-free in the hands of investors.
Hence any investor, who is not worried about the lock-in period of three years, would do well to consider investing in a tax saving scheme with a good track record.
In addition, some of these schemes offer ease of investing through systematic investment plans or SIPs. An investor can give post-dated cheques for a fixed sum which is then invested in the scheme on a particular date. That way the investor not only gets the benefit of rupee cost averaging but also is rid of having to plan every month.
In fact, it is time investors considered tax saving schemes even before investing in Public Provident Fund (PPF) which has a lock-in period of 15 years or Infrastructure Bonds that have a maturity of three years. Before we end, one caveat though: even with their relative safety, investing in any mutual fund is not for the faint-hearted _ even a good track record can be erased by a wayward fund manager.