1. ELSS give twin benefit of tax breaks, higher returns

ELSS give twin benefit of tax breaks, higher returns

INVESTORS in systematic investment plans (SIP) and equity-linked savings schemes (ELSS) of mutual funds are seeing a steady rise...

By: | Published: June 2, 2015 12:05 AM

INVESTORS in systematic investment plans (SIP) and equity-linked savings schemes (ELSS) of mutual funds are seeing a steady rise in their returns. Fund houses were net investors in equities for 13 months in a row in May — the longest-ever trend in the history of India’s asset management companies. SIP and ELSS have become useful options for salaried investors looking at both tax incentive and higher returns. Investments up to R1.5 lakh in ELSS are eligible for deduction from gross income under Section 80C of the I-T Act, 1961.

By taking the SIP route, one can stagger the investments, which would, in turn, bring down the risk sizeably. An investor can put as little as R500 in ELSS, unlike other equity oriented funds where the minimum investment is R5,000. With SIP, you can invest a fixed amount every month for up to 15 years. Money is debited automatically from the investor’s bank account through the ECS mandate and units are allocated based on net asset value applicable for the day. ELSS schemes are open-ended, that is, investors can subscribe to the fund any day.

An investor can put in a fixed sum regularly in the mutual fund scheme as it will average out the cost of acquisition by purchasing more units when prices are low and lesser units when prices are high. In the long run, SIPs will show better returns than an index fund just by averaging out the market volatility in the short and medium term. When the markets are down, it is common for retail investors to opt out of SIPs. Analysts, however say, investors must keep investing a fixed sum regularly and gain on the averaging opportunities even during a market crash.

Since ELSS have more than 65% of their corpus invested in stocks, they are exempt from tax on long-term capital gains as is the case with any other equity fund. The dividend income is also tax-free. Before investing in ELSS, an investor must analyse the track record of the fund for a longer period, instead of just looking at 2-3 months’ performance. They must also see the dividend payout by the fund and whether it is adequately diversified across sectors.

Analysts say an investor must have some equity exposure for better long-term returns and ELSS is a good option as one does not have to look at the performance of individual stocks. By selecting a good ELSS, an investor not only diversifies his portfolio, but also gets better post-tax returns. Returns are dependent on the fund manager’s ability to pick the right stocks, though.

ELSS have both growth and dividend payout options. Analysts say the growth option is ideal for the salaried class because of compounding benefits. Under the growth option, the investor will not get any income during the duration of the investment, but only when the tenure ends. The investor will get a lump sum when the investment matures. In the dividend option, the investor will get a steady flow of income throughout the duration of the investment. However, the income will depend on the stock market.

ELSS funds score better than other tax-savings scheme like Public Provident Fund, National Savings Certificate and five-year bank fixed deposits as it has a lock-in period of only three years. So, next time when you do your tax planning and want to save in mutual fund regularly to get the upside of equity returns in the long run, do consider ELSS.

Linked to growth

* Since ELSS have more than 65% of their corpus invested in stocks, they are exempt from tax on
long-term capital gains
* Analysts say an investor must have some equity exposure for better long-term returns and ELSS is a good option as one does not have to check the performance of individual stocks
* ELSS have both growth and dividend payout options. Analysts say the growth option is ideal for the salaried class because of compounding benefits
* ELSS scores over Public Provident Fund, National Savings Certificate and five-year bank fixed deposits as it has a lock-in period of only three years

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