What are ELSS
Funds?
Equity Linked Savings Scheme, better known as ELSS Funds or
Tax Saving Mutual Funds allow an individual or HUF to invest in a diversified
equity mutual fund to claim a deduction up to Rs. 1.5 Lakhs under Section 80C
of the Income Tax Act 1961.
These funds allow an investor to claim dual benefits of tax
saving along with availing equity growth.
Why you must
move on from a tax saver’s mindset to a tax planning mindset?
Pick out any business related newspaper or website in the
month of February or March of each year and the words ‘’Tax Season’’ will be
mentioned without fail several times.
This is sadly a testament to a larger issue of poor planning
on the part of investors when it comes to their taxes. Planning is not
restricted to any season, in fact no matter when you begin you will always be
late but the earlier you start, the better.
Another issue this mindset of making tax saving investments
at the last moment is that it welcomes a sense of panic that could be avoided.
Never underestimate the frailties of human behavior under stress, a student
under-prepared would use the calculator to cross check what is 4 plus 3 because
that’s just how pressure works.
Under stress and a strict deadline, investors often tend to
take the wrong call for the fear of missing out on saving taxes for the current
financial year.
These wrong decisions include:
- Wrong choice of fund
- Over Diversification
- Making Lump Sum investments
- Not attaching ELSS fund to a goal
The solution to get over these manifold issues is to:
- Start tax planning on 1st April of the financial year and not 31st March
- Move on from tax saving mindset to tax planning mindset.
What is not tax planning?
- Investing during the last month, week or in some cases even last day of the financial year.
- Investing in most ‘top rated’ ELSS scheme. Top rates and most suited are two different points.
- Investing without any consideration for strategy applied by Fund.
A tax planning mindset means you are investing first and saving later.
How to invest
in ELSS?
There has often been considerable debate among the investor
community as to which mode one should prefer to make investments into Tax
saving funds, lumpsum or SIP.
For tax saving either would do but for tax planning SIP is
more valuable to invest in ELSS for the following reasons:
- When one does an SIP, he/she does not need to time the market (not as if that is possible). But can keep his/her investments in auto mated mode via SIP facility.
- Using SIP, one can avail of rupee cost averaging that comes along with it.
- If one uses the Lump Sum route at the last moment then there is a high chance of panicking due to lack of time which may lead to ill-suited choice of funds.
- SIP is all the more beneficial during a market downtime since you would be accumulating more units at a lower price. This is not possible when the markets are at a high and you make a lump sum investment.
When you divide your SIP’s over a period of 12 months, you
open yourself to the possibility of availing benefits of rupee cost averaging
without consideration for market conditions.
Now imagine it’s the month of March and time is running out,
you thereby are now forced to make a Lump Sum investment at times with no
proper planning beforehand. In case the markets are doing really well you would
be buying at a high. Now this becomes an issue if you redeem the same after 3
years and the markets are hovering around the same place as it was when you did
the investment.
Keep in mind that there have been instances in the past that
the month of March in a financial year has done much better than the rest of
the year. Now if you had done an SIP you would have been at an advantage since
you would have bought more units at a lower price but in case of Lump Sum
investment in a market high you would get fewer units at a higher price.
Of course equity investing is not as black and white as
portrayed but the point still remains, tax planning any day supersedes tax
saving.
How to link
your ELSS Funds to a goal?
If your mutual funds are not linked to a goal then your
investments are not planned.
Hypothetically let’s assume you can invest up to Rs 60000 in
a given financial year.
This would mean a monthly SIP of Rs 5000 for a year.
Every SIP installment is counted as a fresh investment so
therefore each installment would have to complete the lock in period of 3
years.
The following example will guide you on how to use ELSS investments
of 5 years for a 10 year goal.
| Scheme | Mode | Amount | First Date of Investment | Last Date of Investment | Amount Invested | Value as on 31/03/2019 | Wealth Gain |
| Birla ELSS | SIP | 5000 | 01/04/2009 | 31/03/2014 | 3,00,000 | 9,00,773 | 6,00,773 |
| DSP ELSS | SIP | 5000 | 01/04/2009 | 31/03/2014 | 3,00,000 | 9,12,549 | 6,12,549 |
ELSS investments in the above example has been done for the following financial years
2009-10
2010-11
2011-12
2012-13
2013-14
The above example is a
classic case of the value of long term growth and benefits of compounding.
*Investments have been
made for 5 years but have stayed invested for 10 years.
Past performance is no guarantee of future returns
The above caveat is true
for any equity scheme and not just ELSS funds.
Before we get to how you
can link your ELSS funds to a goal, do take cognizance of the following points
·
Amount of
Investment
·
Time horizon
·
Risk Appetite
What are the goals you can consider to
link with ELSS Funds?
These
should ideally be Long Term goals, say anything up to 10 years and above. The
longer you invest and the longer you stay invested the better.
These
goals could include the following as an example
·
Child’s Higher
Education
·
Child’s Wedding
·
New House
You can also look at it as
your retirement fund but in that case you would have a longer time horizon as
compared to the above points.
Why you must link your ELSS funds with a
goal?
| Scheme | Mode | Amount | First Date of Investment | Last Date of Investment | Amount Invested | Value as on 31/03/2019 | Wealth Gain |
| Birla ELSS | SIP | 5000 | 01/04/2009 | 31/03/2014 | 3,00,000 | 9,00,773 | 6,00,773 |
| DSP ELSS | SIP | 5000 | 01/04/2009 | 31/03/2014 | 3,00,000 | 9,12,549 | 6,12,549 |
The wealth gain in the above example is double the amount invested, investments have been done for a period of 5 years but have stayed invested for 10 years.
All the types of goals
mentioned above need a time horizon of 10 years.
The reason for such exemplary
performance of these schemes can be better understood for their portfolio
allocation.
 |
| Source:ValueResearch |
ELSS Funds have no
restriction when it comes to category unlike Large Cap, Mid Cap and Small Cap
Funds. This means the fund manager has a free run across sectors and categories
he/she has a firm conviction on.
Not all Fund managers
employ the same strategy though, some tend to be more aggressive than the rest
comparatively. In other equity funds a fund manager may be restrained in his
choices for higher risks no matter how calculative, often leads to more drops
too in case the markets are bleeding.
This would lead to higher
rates of redemptions, as was the case with Hybrid Aggressive funds in 2019.
With ELSS Funds though, a
Fund Manager has no fear of redemptions at least for the next 3 years since the
date of investment. This would mean a longer time horizon for his stock
pickings. (This approach opens the door to look for cyclical businesses).
As can be witnessed from
the image, almost 27 % of the entire portfolio is allocated to mid & small
caps,so more than a quarter of the entire portfolio is completely aggressive.
 |
| Source:ValueResearch |
56.29 % of the entire
portfolio is allocated to mid & small caps,that’s more than half of the
portfolio.
On the basis of the above
observation, it is fair to conclude that DSP Tax Saver Fund is more conservative
than Aditya Birla Tax Saver Fund which proves our above point of every Fund
Manager having his/her own unique approach to the Fund since he/she is not
bound by any sector or category.
Even though you cannot
redeem your investments before 3 years, the approach a fund manager takes is
important since aggressive funds tend to fall more and rise more whereas
conservative funds tend to fall less and rise less too.
Hypothetically let’s
assume that the returns eventually are more or less similar and yet approaches
matter since the level of volatility is directly proportionate to how calm you
are towards your investment. An investment that makes you money but takes away
your sleep is not a sound investment. (This is more applicable to investors
viewing their portfolio on a daily or weekly basis)
How ELSS compares to other Tax Saving Instruments?
*Approximately, varies from bank to bank.
How ELSS compares to other Tax Saving Instruments?
| ELSS | PPF | ULIP | Bank Deposits | |
| Minimum Investment | Rs 500 | Rs 500 | Depends on Premium | Rs 1000 |
| Returns | Market Linked | 8% | Market Linked | 6.5% to 7.25% * |
| Lock in Period | 3 Years | 15 Years | 5 Years | 5 Years |
Why ELSS Funds can be a substitute for
Multi Cap Funds?
Therefore at times both
these schemes in your portfolio may have a tendency to overlap.
This is more so the case
with schemes of the same AMC.
In case they do, you would
be better off with a scheme from another category or schemes from different AMC’s.
When you compare the below
images of Multi Caps with the earlier Tax Saving Funds, you would conclude that
more or less, schemes of both categories are largely biased towards large caps.
 |
| Source:ValueResearch |
 |
| Source:ValueResearch |
Remember, if you cannot explain your diversification then you do not have a diversified portfolio.
How linking your ELSS Funds to a goal
helps?
· When you know
what approach the scheme is applying, it opens up space in your portfolio. For
eg if your ELSS fund is applying a Multi Cap scheme then you need not have
another scheme from Multi Cap category, same with the case of Large & Mid
Cap scheme and so on.
· The above
approach avoids duplication in your portfolio, duplication of schemes has always
been a worry but it has become all the more important in recent times with
Mutual Funds garnering considerable support as an investment option.
· When you attach
your goal to a fund, it becomes easier to stay invested when things are down.
This is because knowing why you started works as your biggest support,
abandoning a project mid -way is much easier when you do not know where you are
headed.
· When you link
your ELSS Funds to a goal, it not only opens up space in your portfolio but
also saves money. For eg if you are investing Rs. 5000 towards a goal, the same
Rs. 5000 can now be invested via ELSS Funds, this means the earlier Rs. 5000
can now be linked towards another goal or for that matter can be looked at for
a completely different instrument (like debt).
Only when we move on from a Tax Savings mindset towards a Tax planning mindset will ELSS Funds find its true value in a portfolio.
FAQ’s
Which mutual
fund is best for tax saving?
There are no best mutual funds for tax saving per se but
there are most suited funds for tax saving as per one’s risk profile. We have
discussed above the volatility attached to different approached to ELSS Funds
in DSP Tax Saver Fund and Aditya Birla Tax Saver Plan.
Which mutual
funds are eligible for 80c?
Only Tax Saving (ELSS) Mutual Funds are available for
deduction under 80C of the Income Tax Act.
Can ELSS be
redeemed before 3 years?
No, ELSS Funds cannot be redeemed before 3 years. For the
purpose of calculation, each SIP installment will be treated as a fresh
investment and each of these investments have to complete 3 years individually.
Can you stay
invested beyond the lock in period of ELSS Funds?
Yes and it is advisable to stay invested as long as possible
since Equity Mutual Funds require a minimum time horizon of 5 years.
