After the deluge, comes the drought. The New Year brought the festive season truly to an end, as the stock markets witnessed a major correction in early January, and remained volatile through the month, with the Sensex plunging 0.7 per cent and Nifty returning a loss of 1.1 per cent. As a consequence, after quite some time, average returns from diversified equity schemes entered negative territory with -1.4 per cent return. That was some fall, considering that December 2004 provided 9 per cent return. Out of the 90 schemes considered, only 22 were able to beat the benchmark Sensex in the diversified equity category. Debt markets too continued to be in bad shape resulting in yet another poor performance from debt-based funds.

It's not all gloom, though. The announcement of some good corporate results saw both domestic and foreign institutional investors returning to the bourses. Even the early correction had its positives, allowing many to enter the markets at low levels. Redemption pressures due to profit booking, which was there in the last month, eased out this month and mutual funds became net buyers after a period of seven months. Fund houses are aggressively coming out with new products to woo investors based on their risk appetite. The government's decision to allow provident funds to invest in equity mutual funds has also been received well, as it would allow mutual funds to increase their assets under management.

Fund Performance

Among individual segments, Escorts Growth Plan emerged at the top of diversified equity funds category, giving a return of 3.9 per cent in absolute terms, which was good considering the overall environment, but well below the 11 per cent it returned in December 2004. The fund has high exposures in Jindal Iron & Steel and L&T but has a small fund size. An Escorts fund came out on top in the ELSS segment as well, posting a 4.32 per cent return, much higher than the category average, a lowly -0.36 per cent. All the others were in the range of 1-1.6 per cent.

Also into negative territory were the average returns from balanced schemes, down from a healthy 6 per cent in December. And guess who topped? Escorts, again, showing 2.34 per cent growth in its NAV, making it a hat trick. The toppers in this segment all posted positive returns, with the exception of SBI Magnum Balanced. Returns fell compared to last month, though, with runner-up Kotak seeing a fall from 9.1 per cent to 1.21 per cent. Among sectoral funds, three of the top five belonged to the FMCG category, which was incidentally the only one sector to give positive results this month. The topper, Alliance New Millennium, had highest exposure in Mphasis BFL, while runner up Prudential ICICI FMCG had highest exposure in ITC.

Bringing a semblance of stability to an otherwise gloomy scenario were liquid funds, which gave a category average of 4.79 per cent in January. The leaders ran one another pretty close as #1 LIC MF Liquid Fund gave 5.2 per cent simple annualised return, and #2 Kotak Liquid gave 5.19 per cent. Among MIP schemes, which are a favourite because they have a flavour of equity (meaning higher returns than income schemes, but with minimum risk), retaining top slot in January was UTI MIS Advantage Fund, which gave 5.6 per cent simple annualised return, much above the category average of -0.56 per cent. But to put things in perspective, this was still much lower than the 20 per cent it returned last month.

Income schemes performed well, with 4 per cent annualised return for the category. Topping the list was Can Income scheme, which managed to give 10 per cent return this month, much higher than the rest of its peers (none of the other rank holders could go above 8 per cent). And among Gilt funds, which saw a category average of 2.9 per cent, Sundaram Gilt Fund came out tops with 13 per cent simple annualised return. Which was a surprise as this scheme was generating returns in negative territory in December.

Despite the overall poor showing, though, things can be expected to look up, what with companies showing strong results, and the Sensex, despite the volatility, slowly but surely getting back into a climb. That should mean better news for mutual fund investors in the ensuing month.

Taxing Time
It's February, and time to chalk out your tax strategy. Here are some tips that might help.

By Shilpa Nayak

Now that the Christmas and new year jamborees, and their hangovers, are over, it's time to roll up your sleeves, and bring out those calculators and savings documents for a dedicated tax-planning session. While tax plans will differ from person to person depending on the salary earned, investing philosophy, risk appetite, etc., it does help to have some advice going around to help you tally your income statement.

If you're a salaried person, you're likely to get a gross taxable salary statement from your employer. After the standard deduction, it's time to look at available options for tax savings. Here, Section 88 forms the most important aspect of tax planning (see Where You Can Save for some others) since the sums invested are deducted from the tax liability and not the taxable income. Says Rajiv Bajaj, CEO, Bajaj Capital: "An investment of Rs 1 lakh per year can help reduce taxes considerably if distributed in the right proportion over the constituents of Section 88." Rs 1 lakh is the investment limit under this section (for rebates of 20 per cent and 15 per cent on incomes of under Rs 1.5 lakh, and between Rs 1.5 and 5 lakh). Two options are available here: one, Rs 70,000 can be invested across life insurance products, EPF, PPF (maximum: Rs 60,000), NSC/NSS, Franklin Templeton Pension Plan (max: Rs 70,000), repayment of housing loans (max: Rs 20,000) and equity-linked savings schemes (ELSS, max: Rs 10,000). Two, up to Rs 30,000 can be invested in infrastructure bonds issued by institutions such as ICICI or IDBI. ELSS is an important long-term element here. For one thing, it gives an equity flavour to an otherwise debt-based tax plan; for another, it gives better returns in the long run.

And in the fixed income category (fixed deposits, debentures, bonds, etc.), PPF tops the favoured investment tools, despite signs that it may be withdrawn soon. Says Kirit Sanghvi, CEO, K.S. Sanghvi & Co.: "Even if it (PPF) is withdrawn in the future, the capital is unlikely to be taxed." You get the idea.