You and I have at some point invested in mutual funds, more specifically, tax saving funds.
The tax benefit under Section 80C is too sweet to let go off. And of course, we also get to invest in a market linked, inflation beating instrument.
The tax saving funds is a clearly marked out category and almost every fund house offers at least one tax saving fund.
Put it to count and over 40 tax saving schemes are competing for your and my attention and money.
Now, I have been thinking – do we really need tax saving funds?
Don’t get me wrong. Yes, we need the tax saving benefits. We just don’t need a different set of funds to give us the benefit.
And this is what I argue today.
Remove this category called Tax saving funds.
We don’t need it. We can use the existing funds to do the job.
Here are 2 reasons why I say this.
#1 Tax saving funds are not differentiated by strategy or a unique investment proposition.
It is well known that most tax saving funds are not unique by themselves. They are close versions of one of the existing funds of the mutual fund house and even follow a similar investment strategy.
Here are a few examples.
- Franklin India Tax Shield Fund – Franklin India Flexi Cap Fund
- HDFC Tax Saver – HDFC Equity Fund
- Quantum Tax Saving Fund – Quantum Long Term Equity Fund
You get the point.
So, if I had to invest Rs. 5000 per month in just one fund for my equity allocation and I need half of that to be invested for tax savings, I actually end up taking two funds. One regular open ended fund, and another, one of the tax saving funds.
As I mentioned before, in most cases, these funds are just close versions of an existing fund.
Why this unnecessary hassle?
#2 The choice is very restrictive
As per the instructions provided by the regulator, a minimum of 80% of a tax saving fund’s assets have to be invested in equity / related instruments.
This makes all tax saving funds – equity funds.
I am not really sure why this restriction should apply.
As an investor, I may not want to invest all my money in equity funds. I may want to choose a hybrid fund or a debt fund at other times.
I am happy to have little more flexibility in the way I choose funds for my tax saving.
That’s when I say –
Allow any fund to participate as a tax saving mutual fund. It could be a debt fund, equity fund, hybrid fund or a Fund of Fund. Any!
This will allow an investor such as you and me more choice. Plus we can use just one fund to take care of our investing needs. Why add one more fund just for tax savings?
And if you are thinking, this could be difficult to execute, let me tell you, it is not.
The best part is this can be done quite easily.
From a fund house’s point of view – they can simply add one more option to each of their existing fund schemes – called “Tax saving”.
Alternatively, without adding a new scheme sub-option, the investor can be asked to specify if the investment in the scheme is for tax saving.
The investor account statement can show such units marked as “Tax savings” or TS.
By the way, marking of units is not anything new. For mutual funds units that are pledged with the bank for the purpose of borrowing, a ‘Lien’ is currently marked on such units.
The same way “tax saving” or TS can be marked for funds and the flag goes away only after the lock-in period expires.
SEBI too has all the reasons to do it
SEBI should be more than happy to kill the tax saving funds category.
It just fits in well with the current scheme rationalisation being carried out. It gets to remove one more category and make it simpler for the investor.
Finally, investors like me get to invest as per the risk profile and preferences. Why impose a particular fund?
Kill the tax saving funds category.
If this happens, using the same examples as before, next time I get to see only this:
- Franklin India Flexi Cap Fund
- HDFC Equity Fund
- Quantum Long Term Equity Fund
How easy on the eye this is.
What do you say? Would you consider this alternative to the current selection of tax saving funds? Do share your feedback.