Spend, Save and Invest Smartly
Normally people think about investment just one or two months before the new financial year. They are concerned only about Saving Tax they don’t bother about their investment. Generally people thing that investments will give them good returns irrespective of the time of investment but the fact is that if you invest without considering the market condition and other economic situations the possibility of making loss is very high. Hence the amount you have saved by not paying Tax might go in vain because of some bad investments. Many believe that two months into the new financial year is perhaps too early to worry about tax planning. This belief can be harmful, mainly for those planning to invest in Equity Linked Saving Schemes (ELSS) of Mutual Funds.
Since ELSS invests primarily in the equity markets, timing is very important for any investor. At a time when equity markets are down, exposure can be made to these schemes to lower your holding cost. Thus, an investor can put his money in these schemes even at the beginning of the financial year if, in his opinion, the equity markets at that moment present a good investment opportunity. ELSS offer tax rebate under Section 80C for an investment upto a maximum of Rs 1,00,000. These schemes usually invest at least 80 per cent of their corpus in equities and have a three-year lock-in period. The unit holder is free to redeem his holdings once this lock-in period expires.
Following are the best ELSS on the basis of last 5 years performance :
|Fund Name||NAV (Rs.)||1 Year||3 Year||5 Years||From Inception|
|Sundaram BNP Paribas Taxsaver-G||36.02||14.95%||20.98%||33.92%||22.54%|
|Canara Robeco Eqt Tax Saver-D||18.2||27.45%||23.06%||30.60%||14.98%|
|Sahara Tax Gain-G||27.71||22.65%||18.60%||27.82%||29.08%|
|Taurus Tax Shield-G||27.29||10.89%||25.37%||27.64%||11.25%|
|ICICI Pru Tax Plan-G||93.61||6.19%||8.15%||27.37%||25.13%|
|Franklin India Taxshield-G||150.69||13.10%||13.77%||25.03%||30.11%|
|HDFC LT Advantage-G||97.58||10.10%||10.38%||23.85%||30.37%|
|BSL Tax Plan-D||45.16||3.36%||9.98%||23.67%||24.68%|
Returns upto 1 year are absolute and over 1 year is annualised.
We feel that the current trend in the equity markets presents a good opportunity for those intending to use ELSS for tax saving purposes because after the financial crisis, now the market is in the way of growth. So this will help your investment to grow faster. The first advantage of ELSS is that these carry a lock in of just three years compared to a much higher lock in of other options like PPF, NSC, etc. The situation turns even more attractive when the concerned ELS schemes decide to distribute a dividend or bonus during the lock in period. Dividends distributed and the units credited in the event of a bonus declaration are not covered by the lock in clause. Therefore, in these schemes, an investor can get back a portion of his money invested even during the time of lock in period.
One more advantage is that this ELSS investment comes with greater transparency. Mutual Funds are, by law, required to disclose their portfolio to their unit holders. Therefore it is easy for the investors to monitor how his investment is performing. Most other tax saving alternatives carry a fixed rate of return but ELSS carry an upside potential as they invest in equities, possibility of making huge return is very high. It also offers the flexibility of investing regularly in small amounts (SIP). This can be done through systematic investment plans of these mutual fund schemes.
Following are the major benefits of ELSS
ELSS offers you the potential for superior returns with three major benefits. It offers you Tax benefit under Section 80C. Since it is a long term investment it gives a compounding effect to your returns. Finally your money is managed by a professionally qualified Fund Manager, and it has an exposure across the capital market. In normal Mutual Finds will have the advantage of compounding effect and Fund Manager Service but you won’t get the tax benefit. So it makes ELSS different from others kinds of investments.
However there are drawbacks too. One of the most important drawbacks of ELS Schemes is that there is no assurance of even any base level of returns. This is because these funds are completely invested in the equity markets which, can fluctuate to any extreme. On the other hand, the long-term investment horizon of this fund does help in lowering the risk on this front. Following are the major drawbacks of ELSS :
A smart investor can make maximum revenue out of ELSS by choosing the best available plan in the market. While selecting one he should keep the following parameters in mind.
While past performance is no assurance that a scheme will do well in the future, it is a good indicator of its future potential.
Many ELS Schemes offer a choice between dividend and growth options. Choosing the dividend option will make an investor eligible to receive dividends from the scheme which, if declared during the lock in period.
For investors not very enthusiastic to put in their money for a three year period it makes sense to choose a scheme that can potentially declare a dividend or a bonus because this allow them to withdraw the dividend/ bonus amount during the lock in period.
As per Income Tax act 80c ELSS investment up to Rs 1,00,000 are eligible for deduction from the gross total income therefore reducing the total taxable income.
If your total annual income is Rs. 4,00,000 and you invest Rs 1,00,000 in ELSS then your taxable income will become Rs 3,00,000. As per new budget if your income is 4,00,000 you have to pay 20% tax but if you are investing in ELSS your taxable income will be Rs. 3,00,000 as a result you have to pay only 10% Tax.
Previously there was an upper limit for investing in tax saving instruments like ELSS. Only individuals with less than 5,00,000 annual income are allowed to invest in tax saving instruments. But l now any individual can invest in ELSS irrespective of their income level.
One of the best ways to investing in ELSS is to save and invest on a regular basis. A Systematic Investment Plan (SIP) in ELSS gives the best combination of investments available to investors. It allows you to invest a fixed amount every month. The minimum investment in an ELSS through the SIP can be as small as Rs 500. With SIP investor can take advantage of fluctuations in the stock market. So investor will get more units when the market is down and get fewer units when the market is up. For instance if you are investing Rs 2000 every month and you will get 100 units for when Net Asset Value (NAV) is Rs.20 and will get 50 units when NAV is 40. So investing a fixed sum regularly helps to cover the market fluctuations by rupee costs averaging. Most of the Asset Management Companies (AMC) charges less entry load for SIP compared to normal purchase.
One can hope to receive superior returns from ELSS in comparison with others investments. Other options like EPF, PPF, five-year FD, etc. offers fixed rate of return (currently around 8%), whereas ELSSs can give you nearly 15%. One year, stocks may be down 50%, but over a period of 3-5 years you can hope to get an average return of 15%. This is because historical data shows that stocks have the potential to outperform all other asset class in the long run. ELSSs also beat other equity MF schemes, as they have a compulsory 3-year lock-in period.
The returns from ELSS before the fall of the stock markets were greater than any other tax saving option. ELSS is the best option for investors who are looking with an investment horizon of 3-5 years. The short term weakness in the market will glide down and will earn the investor with better returns in the long run. The performance and the ability of the stocks in the long run can never be beaten with any other financial instruments. So ELSS will be the best option for you to invest with tax benefit.