Open-ended Mutual Fund tax savers give btter returns than close-ended Instruments

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Mutual fund investors in open-ended tax-saving schemes can also exit directly with the fund after lock-in of three years

EQUITY-linked tax-saving schemes of mutual funds come in two types ­ open ended and close-ended schemes. A performance comparison of the two, carried out by FC Research Bureau, on their one-, two and three-year returns, reveals the open-ended tax saving schemes to have outperformed their close ended peers.

As of their January 17 net asset values (NAVs), the 13 close-ended tax-saving schemes analyzed gave one year returns in the range of 17.57-34.08 per cent with the average return being 24.23 per cent. Their average compound annual growth rate (CAGR) of returns in the two and three year periods were 4.02 per cent and 4.81 per cent, respectively.

On the other hand, 37 open-ended tax-saving schemes gave one-year returns ranging from 4.61 per cent to 38.03 per cent, with the average return being 25.31 per cent. Their respective two and three-year CAGR of returns of 4.64 per cent and 5.52 per cent were also higher than their close ended peers in the corresponding periods.

 

Almost all the 13 close ended tax-saving schemes had long-tenures of 10 years or more and, therefore, their comparatively lower returns in the short-term matter primarily to the short-term investor and not to the long term ones. A long-term return analysis, covering seven-year CAGR of returns, also showed 19 open-ended tax-saving schemes to give an average of 9.19 per cent, lower than 9.85 per cent provided by two close-ended tax-savers having that long a track record. Interestingly, however, in a comparison of their nine-year CAGR of returns, 13 open-ended tax savers delivered an average of 14.97 per cent, a tad higher than a solitary close ended tax-saver (the only one to have a nine-year track record) that gave 14.83 per cent.

However, long-term investors can not exit from the close-ended schemes as redemption at NAVs before maturity is not possible in a close-ended scheme. Close ended schemes have their units listed on the stock exchanges but the liquidity is almost completely absent in their listed units.

Open-ended tax-saving schemes offer relatively better liquidity as after the mandatory three-year lock in for availing of income-tax benefits (investment amount deductible from total income up to a maximum of Rs 10,000) is over, they can redeem their units directly with the mutual fund at daily NAVs.

As on December 31 last year, Association of Mutual Funds in India's data showed that of the total assets under management of Rs 25,223 crore in tax-saving schemes, as much as Rs 22,736 crore were in open ended schemes.

 

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