Mutual Fund Industry in India

The Evolution The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases: Phase 1. Establishment and Growth of Unit Trust of India - 1964-87 Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was tranferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Mastershare (Inida's first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores. Phase II. Entry of Public Sector Funds - 1987-1993 The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Muatual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share. Assets Under 1992-93 UTI Public Sector Total Amount Mobilised Management 11,057 1,964 13,021 38,247 8,757 47,004

Mobilisation a

Phase III. Emergence of Private Secor Funds - 1993-96 The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutal fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-

servicing technology. By 1994-95, about 11 private sector funds had launched their schemes. Phase IV. Growth and SEBI Regulation - 1996-2004 The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Invetors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutal fund players on the same level. UTI was re-organised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilisation of funds from investors and assets under management which is supported by the following data: GROSS FUND MOBILISATION (RS. CRORES) FROM 01-April-98 01-April-99 01-April-00 01-April-01 01-April-02 01-Feb.-03 01-April-03 01-April-04 01-April-05 TO 31-March-99 31-March-00 31-March-01 31-March-02 31-Jan-03 31-March-03 31-March-04 31-March-05 31-March-06 UTI 11,679 13,536 12,413 4,643 5,505 * -

PUBLIC SECTOR PRIVATE SECT 1,732 4,039 6,192 13,613 22,923 7,259* 68,558 1,03,246 1,83,446

42

74

1,46

2,20

58

5,21

7,36

9,14

ASSETS UNDER MANAGEMENT (RS. CRORES)

AS ON 31-March-99

UTI 53,320

PUBLIC SECTOR 8,292

PRIVATE SECTOR

Phase V. Growth and Consolidation - 2004 Onwards The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

The graph indicates the growth of assets over the years.

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a

fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. 2. Close - Ended Schemes: These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unitholder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-

bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

Overview of existing schemes existed in mutual fund category: BY NATURE

1. Equity fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as: Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government. Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks

slightly high on the risk-return matrix when compared with other debt schemes. Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter viz, Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

By investment objective:
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Other schemes
Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate. Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index. Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

TOP Types of returns

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors: Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.

If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also

usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

TOP Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. Advantages of Investing Mutual Funds: 1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. 3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis. Disadvantages of Investing Mutual Funds: 1. Professional Management- Some funds doesnt perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks. 2. Costs The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon. 3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the

manager often has trouble finding a good investment for all the new money. 4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Open-Ended Schemes These do not have a fixed maturity.You deal with the Mutual Fund for your investments and redemptions.The key feature is liquidity.You can conveniently buy and sell your units at Net Asset Value(NAV) related prices, at any point of time. close ended schemes. Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close ended schemes. You can invest in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the schemesNAV on account of demand and supply situation, unitholders expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.Some close-ended schemes give you an additional option of selling your units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor under the close ended schemes.

Interval Schemes These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices. (B) By Investment Objective

Growth Schemes Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short term. Income Schemes Income Schemes Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for:

Retired people and others with a need for capital stability and regular income. Investors who need some income to supplement their earnings.

Balanced Schemes Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls. Ideal for:

Investors looking for a combination of income and moderate growth.

Money Market / Liquid Schemes Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for:

Corporates and individual investors as a means to park their surplus funds for short periods or awaiting a more favourable investment alternative.

Tax Saving Schemes (Equity Linked Saving Scheme - ELSS) These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds.Eligible for deduction under section 80C .Lock in period three years Ideal for:

Investors seeking tax incentives.

Special Schemes This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex, the NSE 50 (NIFTY) or sector specific schemes which invest in specific sectors such as Technology, Infrastructure, Banking, Pharma etc.Besides, there are also schemes which invest exclusively in certain segments of the capital market, such as Large Caps, Mid Caps, Small Caps, Micro Caps, 'A' group shares, shares issued through Initial Public Offerings (IPOs), etc. Index fund Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Fixed Maturity Plan Fixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and are close ended with a fixed tenure, the maturity period ranging from one month to three/five years. These plans are predominantly debtoriented, while some of them may have a small equity component. The objective of such a scheme is to generate steady returns over a fixed-maturity period and protect the investor against market fluctuations. FMPs are typically passively managed fixed income schemes with the fund manager locking into investments with maturities corresponding with the maturity of the plan. FMPs are not guaranteed products. ExchangeTraded Funds Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Globally, ETFs have opened a whole new panorama of investment opportunities to retail as well as institutional investors. ETFs enable investors to gain broad exposure to entire stock markets as well as in specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investing.

An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX Nifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETF's trading value is based on the net asset value of the underlying stocks that it represents. It can be compared to a stock that can be bought or sold on real time basis during the market hours. The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed on the NSE on January 8, 2002. Capital Protection Oriented Schemes Capital Protection Oriented Schemes are schemes that endeavour to protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity / equity related instruments as a secondary objective. The first Capital Protection Oriented Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for subscription on October 31, 2006. Gold Exchange Traded Funds offer investors an innovative, cost-efficient and secure way to access the gold market. Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007. Quantitative Funds A quantitative fund is an investment fund that selects securities based on quantitative analysis. The managers of such funds build computer based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model. The first Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on October 25, 2007. Funds Investing Abroad With the opening up of the Indian economy, Mutual Funds have been permitted to invest in foreign securities/ American Depository Receipts (ADRs) / Global Depository Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities. While most such schemes invest in securities across the world there are also schemes which are country specific in their investment approach. Fund of Funds (FOFs) Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of these schemes comprise only of units of other mutual fund schemes and cash / money market securities/ short term deposits pending deployment. The first FOF was launched by Franklin Templeton Mutual Fund on October 17, 2003. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g. Aggressive/ Cautious FOFs etc.

ELSS Funds
ELSS-means-Equity linked saving scheme. ELSS funds have a lock in period of 3 years; the lock in period prevents unnecessary withdrawals and helps your money grow over a period of time. This allows you to ignore the short-term slumps and stay invested for a long period. The potential of equities start to show only after a few years. Diversified funds are those, where you can invest your money in different stocks of different companies. It is important that before you buy a company's share--you assess whether the price of the at which it is available for purchase valued. Similarly-when you sell. You need to make sure that you are not selling too cheap.
1. ELSS - Equity Linked Saving Scheme: Its a Tax saving tool. 2. The only difference between an ELSS and a diversified Equity scheme is that ELSS has a mandatory lock in period of three years. 3. ELSS enable tax benefits under section 80C up to Rs. 100000/-.

4. Systematic Investment Plan (SIP) is an effective way of investing in ELSS. 5. ELSS can be Growth or Dividend based in which Dividend is further divided into Dividend Reinvestment and Dividend Redeemed. 6. ELSS gives higher returns compared to PPF or NSC.

Why you must invest in ELSS funds

The purpose of tax exemption under section 80C is to promote the habit of savings and longterm investment. However, we generally don't plan for the ideal investment avenue in advance and take last minute decisions, disregarding all the good advice we get about choosing investment products well. With this article, we evaluate the ELSS mutual funds category, a Section 80C favorite, and discuss the best way to get the most out of your ELSS investments. As per Section 80C of Income Tax Act, individuals are allowed to invest up to Rs 100,000 in tax saving instruments, which will be deductible from their gross total income. Tax-saving mutual funds (or ELSS -- equity linked saving schemes as they are more popularly known), insurance plans, PPF, and NSCs are some of the avenues where an investor can invest and save tax. When selecting a tax saving product, choose one that can help you meet your financial objectives and matches your saving patterns. Broadly, consider the following points: 1. Liquidity Investment avenues available under section 80C carry lock in period ranging from three years to 15 years. So select a product which is in line with your investment horizon.

2. Risk & returns

There is always a tradeoff between risk and returns -- the higher the potential returns, the higher
the risk. Select a product which is suitable to your risk appetite. 3. Inflation protection Inflation eats into the value of your returns. Consider 'real returns' (returns minus inflation) when evaluating whether a particular product can help you meet your financial objectives. 4. Tax implication at redemption Apart from the tax benefit under section 80C, tax implications on the returns are also an important point to consider while selecting a investment product. The interest earned on fixed deposits or NSC (National Saving Certificate) is taxable and hence that reduces returns on these products. Long-term returns on mutual funds (more than one year) are tax-free. Investing in an ELSS fund

Equity linked saving schemes are equity-oriented mutual funds with tax benefits. They score
over other tax saving investment products in some respects. They have the lowest lock in period, of three 3 years, and being market linked have the potential to generate good returns over long term. Investors with moderate to high risk-appetite should seriously consider investing in these funds. However, it is difficult to ignore the assured returns and capital protection aspect of other products like PPF, NSC and FDs. Dividends received from ELSS funds are also exempt from tax. However, when investing in ELSS funds, it is advisable to not go in for the dividend re-investment option, as each reinvestment will be treated as a fresh investment and will lock in your re-invested money for another three years. This loop makes it difficult to exit the fund completely at one point of time. It is therefore wise to select either the growth or dividend payout option in these funds. The same logic applies if you decide to go in for an SIP mode of investing in ELSS funds. While SIPs are very desirable in terms of allowing disciplined and small investments, each SIP installment is locked in for three years from investment, creating a similar loop. Lastly, this might be the last year that allows you to take advantage of the tax savings offered by ELSS funds.

If the parliament passes the Direct Tax Code, ELSS funds along with many other investment products may no longer attract tax exemption after April 2012. Any fresh investment in an ELSS fund after April 2012 will be treated as an equity mutual fund investment. Selecting an ELSS mutual fund

All together 48 equity linked saving schemes are available in the market. Of these, 37 funds are
open-ended funds, of which 30 funds have a track record of three-years or more. Only 14 funds out of 30 manage to beat the category average in the three-year period. So selecting a right fund is more important, as the money is going to be locked in for three years. For selecting an ELSS fund, one can evaluate the following parameters:

Historical track record of the fund: The historical performance of the fund can be evaluated across various time periods to see how the fund has performed compared to its benchmark or other comparable indices and the peers. That apart, fund performance in falling markets can also be looked at to get better perspective about the fund. Consistency of the fund: Consistent performance is an important point to consider when selecting a fund. Some funds give phenomenal performance in one time period and are not able to continue that in future. So prefer to choose a fund that has a history of consistent performance. Track record of the fund manager: The fund manager is the main driver behind the investment strategies of the fund. Historical performance of the Fund Manager can be reviewed by evaluating the performance of the funds managed by him.

Equity linked saving schemes has a good track record, with performance similar to diversified
funds. The category average returns on 3-year, 5-year, 7-year and 10-year are 22.23%, 5.20%, 15.41% and 22.17% CAGR respectively. Even the returns for SIPs (systematic investment plans) are also good. However, market slumps in recent times have hit the performances of equity oriented funds including ELSS. Conclusion Negative news is flowing across the globe every day. Indian economy is slowing down. The profit margins of the Indian corporate sector are under immense pressure due to high borrowing and raw material cost. There has been a downgrade in third quarter GDP and the Indian rupee has depreciated by close to 16% in few months and it is the worst performing currency in Asia. Equity markets (Sensex) have given negative returns of close to 21% year to date. European debt crisis is spreading to major European economies. US economy is also in bad shape. All this has led to a high level of pessimism in the market. However, the equity market has already discounted the negative news. We believe that there may be headwinds on short term, but long term prospects for equity markets are promising and this could be a good time for investors to get equity exposure for long term, via products like ELSS funds.

Top 5 mutual funds to watch out for in 2012

As per Section 80C of Income Tax Act 1961, individuals are allowed to invest up to Rs 100,000 in tax saving instruments, which will be deductible from their gross total income. Investing in tax saving mutual funds or equity linked saving schemes (ELSS) offers not only tax benefits but also an opportunity to create wealth. Equity linked saving schemes are equity-oriented mutual funds with a lock-in period of three years. Dividends received from ELSS funds are also tax exempt. The low lock-in period and the potential to generate market-linked returns make them a tax saving favorite.