The mobilisation in the ELSS segment has witnessed a sharp fall from Rs 1450 crore in 1995 to Rs 24 crore in 1998, mainly on account of their unimpressiveperformance. The under performance of these funds could be partly attributed to the faulty structure prevailing till now. With this key change, ELSS funds should be able to add significant value as tax-planning vehicles combined with improvement in performance. This would make ELSS meaningful tax planning vehicles.

Wider Choice: With the new regulation, fund companies have been saved from the process of floating a new fund in the last quarter of every financial year. The effort and expense involved in launching such schemes and the small corpus garnered have deterred funds even with a good track record from launching new schemes. Now there is the flexibility than even if one tax-saving scheme is launched and garners a modest sum, funds can leverage their performance and attract fresh subscription. This would lead to addition of an open-end tax saver to the product portfolio of every AMC giving investors a wider choice.

Periodic Investments: The open-end structure will make the fund less vulnerable tomarket moods. Since all ELSS schemes were floated in the last quarter of the fiscal and most of the money was collected in March, the fund's performance depended on the market performance at that time. As these funds will now be sold throughout the year, tax-savers can choose to invest at any point of time and take advantage of market conditions. Importantly, the open-end structure for ELSS provides for natural product enhancements, with features of regular investment plan (rupee cost averaging) which will be of special appeal to marginal taxpayers while planning their investments. Right in the beginning of the year, the investor can estimate his tax liability and chalk out a strategy.

Buy a Hot Fund: The earlier framework did not allow an investor to buy an ELSS based on its track record. The investor could take clue from the performance of the tax-plans of a particular AMC, but could invest only in a tax-plan launched for that year. And if a better performing AMC chose not to launch one in that year,investor would have to settle for the second best. With open-end ELSS schemes, an investor can buy into a fund that has a track record and can know the portfolio he is buying before hand.

Roll-Over: The instant liquidity after three years can be advantageous for investors facing a cash crunch. An investor can get his units redeemed after three years and redeploy the principal in the same fund and avail of tax rebate once again. Earlier, one would have to put in investments in a new closed-end fund launched every year. Effectively, it is now possible to lock-in Rs 30,000 over a period of three years and enjoy the tax rebate on Rs 10,000 every year !! That of course assumes that the NAV after three years is above the par value. Even after allowing for the capital gains tax after adjusting for the inflation-index, it could work out to be beneficial. In fact, in certain circumstances, the investor could take advantage of the fund's underperformance i.e if the NAV falls below par value. Investors cofronted withsubstantial capital gains, can simply get the units redeemed and actualise a capital loss and offset it against a capital gain. And if the investor is still optimistic about the fund, he can redeploy the proceeds in the same fund may be at the same NAV.

Further, among the tax-savings options available to Indian investors including life insurance and fixed-return sovereign guaranteed deposit schemes offered by National Savings Organisation, ELSS is the only equity related instrument and carries the shortest lock-in period of three years. Since equities have been proved to be the best long term investment vehicles, they must find a place in the investors portfolio.

Performance Pressure: The fact that there could be numerous open tax-savings schemes competing for the investor's pie will optimise investment performance by fund managers. So far, they could sit back in comfort - at least for three years. Now, they will be under constant pressure to retain existing investors as well as to attract fresh inflows.However, the three-year lock-in period should ensure that the corpus is relatively stable and keeps aside undue pressure on the manager.

ELSS for the Year: Many AMCs have indicated their intention to convert one of their existing ELSS schemes into an open-end fund instead of launching a new one. Currently, Birla and Alliance are offering open-end ELSS while Kothari and UTI have launched closed-end ELSS. Both Birla and Alliance funds have been superior performers till date. Both the tax plans are on a equal footing considering the impressive performance of existing funds from both AMCs. In the past one year, Birla Advantage has witnessed a spectacular appreciation of 95.69 per cent while Birla Tax plan '98 has posted a total return of 62 per cent with the NAV at 16.22 as on February 25, 1998.

Equally alluring is the report card of Alliance '95 which has posted a return of 80.09 per cent in the past year. The only closed-end tax saving fund, Alliance Capital Tax Relief '96 currently has an astounding NAVof Rs 28.75. The exemplary performance is attributed to focussed investment strategy and active fund management. Though the superior performance of the above schemes may not be replicated in the new schemes, both AMCs follow a disciplined approach to investment management and are unlikely to go wrong drastically. Besides, Kothari Pioneer Taxshield '99, though a closed-end fund, has added a unique feature of investing 50 per cent of the corpus in infotech stocks.

--Value Research