I want to invest Rs 30,000 in an equity-linked savings scheme (ELSS). Which among Magnum Taxgain and Sundaram BNP Paribas Taxsaver is a better offering? Are there any new funds that I can look at?
-Deepak Ghavri
It is better to stay away from new funds as they do not have a performance history.
With regard to Magnum Taxgain and Sundaram BNP Paribas Taxsaver, let’s look at their past performances to take a call between them. Both funds have good track records. If we compare annualised five-year trailing returns (as of February 28, 2009), Magnum scores over Sundaram. The former has delivered 25 per cent returns, while he Sundaram has delivered 22 per cent.
However, Magnum has been shedding more than Sundaram of late, especially if you compare the past one-, two- and three-year trailing returns.
In the market meltdown of 2008, Magnum went down by 55 per cent, while Sundaram lost 48 per cent. So we see Sundaram Taxsaver emerging as a more stable offering.
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While investing, everyone has multiple goals with different time horizons. For instance, a marriage in the short-term or retirement in the long-term. Does one need to have separate portfolios for each individual goal? Multiple portfolios would mean maintaining different proportion of equity and debt in each. The number of mutual funds too will shoot up. What is the right strategy?
-Anant Sood
One should maintain a separate portfolio for each financial goal. This is because the investment horizons of different financial goals differ. The portfolios, hence, will need to be liquidated at different intervals. Also, these goals will each require a specific amount.
If an investor creates a single portfolio, it will be difficult for him to differentiate between the time horizons and risk levels akin to each goal. These factors are taken care of by investing in instruments that would suit a particular goal’s requirement.
Money that is required within the next five to seven years must have a higher allocation towards debt. For goals with a longer time horizon, a majority of the investment should go into equity.
If you will not need the money for at least 10 years, all investments can be allocated to equity. The asset allocation, too, needs to be different. It should be as per the financial goals rather than the investor’s age and risk appetite.
You don't need to hold a separate fund for each goal. When you are nearer to one goal, redeem only a part of your investments. Let the rest grow.
Fewer funds can also stop you from over-diversifying your portfolio. They are also easier to monitor and review. Above all, this strategy will be more tax-efficient.
Historically, only limited funds have done well and are expected to deliver in the future. It is better to have limited funds.
I started investing in Magnum Taxgain around two years back through a systematic investment plan (SIP). My purpose was to save tax and accumulate wealth as well. The fund didn't offer growth option when I entered. I had no choice but to opt for dividend re-investment. The scheme now offers a growth option. Is there some way I can switch to this? Also, which is better for wealth accumulation – growth or dividend re-investment?
-Sharad Madan
You cannot change your plan from dividend re-investment to growth before the completion of the mandatory three-year lock-in period. Since you are investing via SIPs, each investment needs to complete three years of holding before you can switch to the growth option.
From the wealth accumulation point of view, the returns would be identical from both the options. But in an ELSS, it is advisable to invest in growth plans If you invest the dividend back, it will be considered as a fresh investment and will be subject to another three-year lock-in period.
What charges does an investment in an ELSS fund incur?
-Gopal Bansal
ELSS charges are same as any equity diversified fund, excepting for the exit load. In case of ELSS, there is no exit load due to the compulsory three-year lock-in period.
ELSS funds can charge an entry load of 7 per cent, but most funds charge around 2.25 per cent only. There is also an expense ratio charged to the investor. This is deducted from the corpus. A fund can only charge a maximum of 2.5 per cent annually as expense ratio.
Can I set-off long-term capital loss from stocks or equity mutual funds against long-term capital gains from debt-based investments?
-Vikalp Agrawal
Long-term capital loss can be set off only against long-term capital gain. But in equity (including equity mutual funds), since long-term capital gain is exempted from tax, a long-term capital loss cannot be set off.
Also, long-term capital loss from debt can be set off only against long-term capital gain from debt investments.
I had invested in Reliance Equity Advantage at the time of its launch. My investments' value has now eroded by 40 per cent. Should I hold or exit?
-Prabhu
Reliance Equity Advantage fund has done well in its short history of over one year. It aims to invest at least 80 per cent of its assets in the stocks of the S&P CNX Nifty Index. It also seeks to mirror the sector allocation of the index on a monthly basis.
The fund has shed less than its benchmark and category. In last year's market meltdown, it lost 49.16 per cent while the index and category shed 51.79 per cent and 55.08 per cent, respectively. Although it does not give the exact benefit of index investing, its mandate makes it a less risky offering. You can remain invested in the fund.
Value Research