In a State of Tax SOS, Try ELSS!

The deadline is fast approaching. If you still haven’t done your tax planning, it’s time to gear up. There is no need to sweat because we are here just for your help (sounds awful lot like some marketing line, is it). Therefore, in the next three months, we will be focusing on a mix of tax related articles that will help you in efficient tax planning and save you some hard-earned money.

FU Tax!

So let us begin this series with an article contributed by Miss Riddhi Kharkia [ACA], a good friend, on Equity Linked Savings Scheme (ELSS).

First off, what is ELSS?

ELSS or Equity linked savings scheme is a type of mutual fund with a particular mode of making investments. It is a scheme that invests 65% of its corpus in equity and equity-linked products. As you can see, it is almost similar to any other mutual fund scheme with a slight variation in investing style. They are the favorite picks for tax planning because they offer dual benefits. Since the money is invested by the fund in equity i.e stock markets, investors get the benefit of capital appreciation plus dividend (if the scheme is dividend-oriented). In addition to that, investment in ELSS would is eligible for deduction to investors u/s 80C, which is capped to a maximum of Rs 1.5 Lakh. [Happy, huh ;)]

A detailed section on benefits.

When it comes to putting your money in any financial instrument, you want to do it with eyes wide open. So why not with ELSS?

To help you invest in this product with full-awareness, here is an elaborate section on benefits of investing in an ELSS.

  1. Since ELSS invests money in equity, it will help you to grow money when the stock market grows over a period of time. Currently, the SENSEX is on a decline owing to some heavy profit-booking activity and falling crude prices. As such, it is actually a good time to invest in the markets. In the later part of the article, I have provided my top three ELSS picks that could be your beginning point for taking the plunge!
  1. Investing in ELSS can help you in utilising tax exemption of Rs 1.5 Lakh in 80C, in case you have not been able to utilize it fully with traditional weapons like LIC premium and PPF/EPF investments. Take a stab at ELSS funds; you will like it 😉

ELSS comes with a lock-in period of 3 years only, the shortest among all tax saving options under Section 80C. In the case of SIPs, each installment is considered as a separate investment and will have a 3 year lock-in period from the date of such installment. The redemption on maturity is on first in first out basis.

After 3 years, you can remain invested for a longer period if you are pretty impressed with the returns and don’t feel like pulling out your money. A 3 year horizon is pretty decent time to help you grow money after considering market fluctuations as well. Additionally, a SIP gives you the benefit of rupee cost averaging. No, it is not some complex jargon but RCA simply implies that a SIP evens out the volatility in the markets and on an average, each installment gives you a hefty return.

  1. ELSS is the only tax saving investment that provides tax free returns for short period. Any returns received from equity funds after 1 year is tax free. Hence any dividends/returns/capital gains obtained from such funds are tax free.

When should you invest in ELSS?

Unlike a fixed deposit scheme or a regular insurance policy where investors can shell out money in lump-sum, this product requires a more mindful approach. Since it is an equity investment, It is prone to market risks and fluctuations and as such, the timing of the entry and exit is very important.

As I mentioned above, the best way to invest in a mutual fund (in this case, an ELSS fund) is creating a SIP because of its ability to generate steady returns over a specific horizon.

How to pick a winner?

Yes, this is a significant question because no one here wishes to lose money. While there are some definite parameters to look for, let me also point out that since an ELSS fund invests in equity, it has some inherent risk associated with itself. So the parameters you should ideally look out for are

  1. Long term performance of the fund.
  2. A glance at the holdings. (You can just take a look at the sectors it is invested in)
  3. Fund manager and performance of other funds managed by him/her.

Honestly, these parameters will give you a fair idea about the fund but as they say, research is never enough. Considering that, one may definitely divulge into further research on aspects like peer performance, expense ratio, leverage in the fund etc.

Conclusion

In comparison with other products under 80C, ELSS stands out both in terms of liquidity and stability. When compared with PPF, I believe PPF is a good investment option when you have surplus funds and you don’t need money in near future (a 15-year lock-in is huge). ELSS is viable when you want to maximize your returns along with tax savings in a shorter tenure.

As promised, here are my top three picks among ELSS funds that should help you get started in the least!

Note: Mutual funds generally offer two schemes – dividend (profits are given to investors from time to time) and growth (profits are ploughed back into the scheme leading to higher NAV). Here’s a look at the performance of the two types of funds.

*In no particular order*

  1. Reliance Tax Saver (ELSS) fund – Growth
  2. Axis Long Term Equity Fund – Growth
  3. L&T Tax Saver Fun – Cumulative

Disclaimer: It is your money. So, please read and invest!!