Taxpayers, usually, start investing in 80C instruments in December or January. No wonder, both asset management companies (AMCs) and insurance providers launch tax-savings schemes in these two months.
As far as mutual funds go, five fund houses have launched their equity-linked saving schemes (ELSS) in the last one month. These include, Edelweiss Mutual Fund, Quantum Mutual Fund, Bharti AXA Mutual Fund, IDFC Mutual Fund and JP Morgan Mutual Fund. With these launches, the total number of open-ended ELSS has gone up to 35.
Selecting an ELSS fund can be a difficult task especially, when a distributor or the agent aggressively markets a fund. But before getting into the details of the ELSS selection, here are few reasons to invest in these schemes.
ELSS is an equity-diversified fund with a lock-in of three years. One can claim deductions on investments under section 80C up to a limit of Rs 1 lakh. Many investment advisers recommend this scheme because the lock-in period helps fund managers prove their efficiency over time. Also, it serves as forced savings for investors because of the lack of liquidity.
Another positive aspect of the fund is that you can invest in them through the systematic investment plan (SIP) route and get more tax benefits, in terms of zero long-term capital gains. However, before investing in an ELSS, you need to look at some important features.
Investment pattern: Just like any equity-diversified scheme, some funds in this category are aggressive and others are conservative in their investment style. An investor should look at the track record over the long term. This helps to understand the investment and management style of a fund.
And depending upon your risk profile, shortlist schemes based on a long-term performance (over five years), compare the returns of these funds in the mid (three)-and short-term (one year). This will give a clear picture of its consistency.
Existing or new funds: The advantage of the investing in existing funds is that it allows one to make a judgement, based on past performance and portfolio. For new fund, obviously, there isn't a portfolio. “It is always better to opt for a scheme that is known than a completely unknown one,” said Dhirendra Kumar, chief executive officer, Value Research, a mutual fund research firm.
However, it does not mean that new funds should be completely ignored. “Look the existing equity schemes of the fund house. Even a new ELSS can be good, if the fund house has a pedigree and its existing equity schemes are doing well,” said Kartik Jhaveri, director, Transcend India, a financial planning company.
Additional benefits: Some tax-saving funds also provide free insurance. For instance, Birla Sun Life Tax Relief and HSBC Tax Saver Equity offer free critical illness cover and DWS Tax Saving gives free life insurance. “Even if these schemes are giving moderate but consistent returns, I would recommend them. Very few people buy critical illness policies in India,” said Mukesh Dedhia, director, Ghalla & Bhansali Securities.
| STRONG RETURNS OVER TIME | |||
| 5-year returns | 10-year returns | ||
| Fund | Returns (%) | Fund | Returns (%) |
| Magnum Taxgain | 25.86 | HDFC Taxsaver | 31.72 |
| Sundaram BNP Paribas Taxsaver | 23.34 | Birla Sun Life Tax Relief 96 | 24.30 |
| HDFC Taxsaver | 18.49 | Magnum Taxgain | 22.23 |
| Canara Robeco Equity Tax Saver | 14.77 | Principal Personal Tax Saver | 20.10 |
| ICICI Prudential Tax Plan | 13.97 | Tata Tax Saving | 19.96 |
Fund Manager: Unlike an equity-diversified scheme, the fund manager should be the last parameter an investor should look at before investing in an ELSS. As this scheme has a lock-in period, the reputation of the fund house is more important. The fund manager may quit the job anytime, but the fund house's overall pedigree will show in the long turn.
Dividend or growth: One has to select either the growth or dividend option. In the first option, the dividends are invested back in the fund. In the latter, the dividend is paid out.
“An investor, who is putting in money only to save tax, should opt for the dividend option. This is true of investors who have high income,” Jhaveri said. They invest to fulfil the Rs 1 lakh investment under section 80C and later get some part of their capital as tax-free dividend.
Sometimes, agents and brokers encourage investors to enter ELSS two-three months before the dividend is declared. As it helps them to get tax-free dividends and helps recover some part of the capital in circumstances.
But Jhaveri feels that many times it is done by brokers to earn more income. “Some brokers ask the investor to invest in another equity-diversified fund to earn more commissions,” added Jhaveri.Ideally, any equity portfolio should have a maximum of 5-6 equity funds. That is, two-three ELSS, along with a couple of equity diversified and one or two thematic or sector funds. The reason: Investing in more ELSS allows the fund manager to invest in stocks that could be illiquid, but would give consistent returns over the long run.
In the current scenario, when stock markets are trading at low valuations, it could be a good opportunity for investors to get into ELSS schemes. For one, they will get more units of existing schemes because of lower net asset values.
Also, given that there is a lock-in period, they should be able to garner good returns when markets turn around in the next few years.
