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Making a comeback

Close-ended tax-saving schemes are a variation of these mutual funds schemes, a majority of which are open-ended, writes Arnav Pandya.

business Updated: Feb 08, 2008 22:24 IST

Alot of equity linked saving schemes are present in the market today. These are also known as tax savings schemes as they are mutual funds that invest in equities and also provide a tax benefit. Close-ended tax-saving schemes are a variation of these mutual funds schemes, a majority of which are open-ended. This change requires a decision about the manner of investing in these instruments.

Nature
A typical close-ended scheme is an equity linked savings scheme for a particular duration of time. This means that the scheme will come to an end after a specified time period and at the end point the money will be redeemed to the unit holders at the prevailing net asset value (NAV). The time period is fixed and known at the beginning of the schemes. As against this, open-ended tax saving schemes have no expiry period and can continue to run for an indefinite period.

Investment and exit
The real issue in the entire scheme is with respect to the time and manner of the investment and exit from it. In case of a close-ended tax saving scheme, the investment can be made only during the initial offer period while in an open-ended scheme the investment can be made at any time that the investor wishes. As far as the exit is concerned the investor can exit a close-ended tax fund only after the lock in of three years and that too usually by paying an exit load. In case of an open-ended tax scheme the exit can be after the lock in of three years and there is no exit load for the transaction.

Not new in India
This is not the first time that such schemes are being launched in India. In the mid nineties, a slew of such schemes hit the market. However after some time, open-ended schemes were found to be more convenient for both the fund house and the investor and the attention shifted to this area with the result that investors also shifted to investing in open-ended schemes at their convenience.

Analysis
Such a scheme would be useful for long-term investors. The same objectives can be achieved with currently available open-ended schemes that have built up a good reputation over the years. Investors would do well to look at their convenience more carefully.

(The author is a certified financial planner)