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Dividend options in debt funds being preferred

Nilanjan Dey

IT'S June already, and time again for investors to do some financial planning for the year. As seen around this period each year, MF distributors have begun to wax eloquent about the importance of investing in tax-saving products: equity-linked savings s chemes (ELSS) which allow investors a rebate of 20 per cent under Section 88 of the IT Act.

The maximum rebate that can be availed of under an ELSS is Rs. 2,000, which requires an investment of Rs. 10,000. Investors should know that all such investments are to be compulsorily locked in for three years.

However, as redemptions need not be necessarily taken after three years, the risk of having to exit at unfavourable NAVs gets reduced considerably. There is no TDS on redemption. Unlike other open-end equity funds, tax savers do not face redemption press ures. It is easier for fund managers to take long-term views and provide enhanced returns.

Some funds allow investors to enter ELSS - and thereby allow rupee cost averaging - through the SIP (systematic investment plan) route as well. Being open-ended, these may be subscribed to at any point of time during the year. In a few cases, one can mak e a beginning with a minimum of Rs. 500.

Dividend options are also available, and investors may opt for tax-free income on their ELSS investments. Among the highest pay-outs in recent times were those by Alliance Capital Tax Relief '96 and Zurich India Tax Saver, which in March and April paid 3 00 per cent and 210 per cent respectively.

Moving on to the rest of the MF arena, people do not seem to be in a hurry to indulge in any major investing. Distributors, nevertheless, indicate that the retail debt segment is getting energised, and investors are increasingly gunning for the dividend options in debt funds. It is learnt that some MFs have lined up dividends, and, as Templeton India Income Fund did a few days back, their announcements are likely soon.

Equity funds, not to mention technology-dedicated funds, are generally lying low, most of them selling at values far below their peak NAVs. Sections in the market believe that the gap will not be easily bridged, especially when stock prices seem to be in no hurry to revert to their March positions. Those who are not overly exposed to IT and other high-risk areas are expected to buck the trend, at least in the short term.

News for IPO watchers: JM Mutual Fund has lined up a few special schemes, a dotcom fund and an M&A fund among them. These would be the first sector-specific products from JM, which currently offers equity, income, balanced, liquid and gilts schemes.