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Mutual funds are going all out to sell their equity-oriented tax savers to investors as the deadline for employees to submit investment proof to companies to avail the tax benefit nears.
Fund houses are doling out as much as 6% to distributors to push equity linked savings schemes (ELSS) to clients, sensing that the enhanced investment limit for saving taxes and strong performance of equity schemes would draw more investors to this product. Investments in ELSS, a close-ended equity scheme with a three-year lock-in, allow investors to avail tax exemption up to Rs 1.5 lakh. Till last year, this limit was Rs 1 lakh.
In the past three years, investors preferred traditional investment avenues such as PPF or tax-saving bank deposits due to poor returns from equities till early February. But, with the market prospects seeing a turnaround last year, distributors said investor interest in ELSS has shot up. "With the outlook for equities improving due to a new government at the Centre and expectations of a better macroeconomic environment, many investors are keen to invest in ELSS under Section 80C," says Harshvardhan Roongta, chief financial planner, Roongta Securities.
In the past one year, average returns from the ELSS category were close to 54% against 29% gains in the Sensex. The return from PPF is fixed at 8.7% per annum. As part of their campaign to popularise ELSS, MF houses are running awareness campaigns and special contests. Distributors are pushing the product on the grounds that its lock-in is shorter than that for PPF, bank deposits and post office’s NSC. Dividend income from ELSS is tax-free.
"For first-time equity investors, ELSS ensures discipline as they are forced to take a long-term view due to the three-year lock-in which comes with this product," says Vidya Bala, head (Research), fundsindia.com Amongst ELSS, Bala recommends Axis Long Term Equity Fund and Franklin India Taxshield. She believes rates are at the bottom of the cycle and it is a matter of time before interest rates on conventional debt products such as PPF and tax-saving fixed deposits are lowered.
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