ELSS: Standing the test of time

TAX FUNDS: ELSS have a long and proven track record, which is missing in ULIPs.

Although equity-linked savings schemes (ELSS) of mutual funds may not have fared as well as ULIPs over the past year, fund managers advise investors to look at these funds more seriously.

They also feel investors should opt for a longer time horizon, as a one-year period is too short for an ELSS.

"Now, ELSS has a long background with a proven track record. An investor can chose from hundreds of schemes, which is not the case with ULIPs. Over the past year, a large number of ULIPs have been launched, and their returns are yet to stand the test of time," says Sanjay Sinha, equity head, SBI Mutual Fund, which runs a successful ELSS "� Taxgain. 
 

STERLING NUMBERS
Fund	5-yr Returns (%)
Magnum Taxgain	59.41
HDFC Long Term Advantage	54.27
HDFC Taxsaver	51.69
Birla Equity Plan	50.68
Prudential ICICI Tax Plan	48.42
Source: Value Research As on Feb 9

Over the long term, ELSS returns are indeed noteworthy. According to Value Research data, ELSS funds have, on an average, earned a compounded return of 41 per cent a year over the past five years. In the same period, the Sensex has seen a yearly gain of 33 per cent.

Mutual funds, typically, cost less than ULIPs in terms of management fees. Sinha says, "The charges deducted by ULIPS are higher in most of the cases, even though they could differ depending on the scheme."

Financial planners advise investors to keep investments and insurance separate. And small investors like Ganesh Barbhai, a 45-year-old private sector bank professional, are implementing that.

He sees no point in mixing the two. Barbhai, who is an avid follower of the stock markets, has a portfolio consisting of 15-20 stocks ranging from Reliance Industries to recently launched mid-cap infrastructure scrips.

ULIP is not an easy product to understand and, if investors are not savvy enough, some of the benefits such as switching from equity to debt may not be utilised.

"My company takes care of both my life and medical insurance. So I do not find any reason to invest in insurance policies, though they are fetching good returns," says Barbhai.

"Besides, while investing into ULIPs, sometimes the investor has to choose between exposure of his premium towards life cover and investments, or among the four-five plans offered by the insurer. I see many hassles here. In ELSS, there is no such hassle, once you pay the basic amount, the AMC deducts its load, and your investment is through," adds he. The entire investment is put in the vehicle (after load) in the case of ELSS unlike ULIPs.

"In ELSS, the entire collection or corpus is put into some or other instrument, while that doesn't happen for ULIP, as part of it is reserved for life cover," says Sinha.

However, there are many who believe the two products are different and cannot be compared.

"I don't think there is any reason to compare ULIP with ELSS. I view the two as totally different investment routes. The basic objective of a ULIP is insuring for life. If compared with the returns given by ULIPs, I think ELSS have performed better, even though it is not prudent to compare sheer returns of the two instruments, irrespective of their nature and objective," says R Rajagopal, equities head, DBS Cholamandalam.

Sinha of SBI Mutual Fund advocates for ELSS "� rather than ULIPs. He says mutual fund schemes give more returns and cost less.

Financial planners advise investors to first get the basics right "� use the tax exemption limit and invest in ELSS, and take a term insurance policy to cover life.

Any surplus investment beyond this amount can be invested in mutual funds or ULIPs, based on the risk appetite.