Tax-saving funds yield negative returns

 The common dictum about mutual fund (MF) investments is that you must not check the net asset values (NAVs) too often. But if you have started your investments in tax-saving funds in the past six months you may be justified in taking a closer look.
    All the top equity-linked savings schemes (ELSSs) are deep in the red with the best ranked fund for the period posting a 25.7% negative return and the worst a 43.46% slump, according to Value Research data.
    In comparison, top performing diversified equity funds for the period have declined 15-20%. "ELSS products have fallen across the board. Given that they follow a passive fund management approach the impact is slightly higher," says Sridhar Parthasarathy, associate VP and head-PMS and research, Cholamandalam DBS Wealth Management. The broad market correction has contributed to the fall in NAVs, he says.

    "This is a good opportunity for new investors. The economy is still strong. In six months things will come under control," says a fund manager of a leading fund house. In tune with the market correction, NAVs of many schemes have hit the nadir. For instance, the NAV of HDFC Tax Saver Growth, a popular ELSS that touched a 52-week high of Rs 208.58 on January 7 reached its 52-week low of Rs 133.54 on June 23. Other popular schemes like Magnum Taxgain and Birla Sun Life Tax Relief show a similar pattern.
    Also, equity as an investment class has consistently outperformed many other options in the long run. And it pays to stay invested for a longer duration, say fund managers. "Equity markets go through a 5-6 year cycle. So, it's normal for a 3-4 year bull period (followed by) a subsequent 1-2 year bear phase. The returns will average out. They (tax-saving funds) still will give a better return compared to other investment options," says Parthasarthy.
    "Investing in equity is a better option. Informed set of investors can use this corrective phase to enter tax-saving funds," says Satish Ramanathan, head, equity, Sundaram BNP Paribas. The top 50 performing funds of last year are believed to have attracted an inflow of Rs 8,000-10,000 crore, say industry sources. The asset base of Sundaram BNP Paribas has gone up 20% since December 30, 2007. As far as Sundaram Paribas was concerned, March has been a good month for tax-saver funds. Since MFs don't hold cash beyond a certain level they are constrained and accordingly get affected with the fall, he explains. This applies even more for tax-savings schemes.