One thing is certain: one never knows what to expect in the stock market anymore. Given the uncertainty over the US economy and its global ramifications, a gain over a few days, however euphoric, can be instantly wiped off if Wall Street goes through a bad day. The decoupling theory has proved to be just that – a theory. And the worst is not yet over. Prolonged weakness across key global economies will continue to play havoc with sentiment back home.
Though you are probably tired of hearing it, the fact remains that the much-touted, long-term India story remains intact. But, in case you never noticed, there are two different stories going on simultaneously. One is the India growth story and the other is the India market story.
The market story is the one that has shaken investors. Given January?s swift and merciless correction (or rather, crash), followed by worse lows in February, it will be a while before confidence returns back to the Street.
Till then, it will be a time of extreme uncertainly and volatility. But for those who believe in the growth story, be prepared to hold on to your investments for at least a year and don?t resort to panic selling. Hold on while the bulls and bears slug it out. But that does not mean you should stop investing just because they are kicking up lots of dust. Do so consistently.
Thematic or sectoral funds may be difficult to digest right now. But well proven, diversified equity funds are the place to be in terms of swimming with the tide. Over here, we are going to talk about equity linked savings schemes (ELSS). These are diversified equity funds which offer the tax benefit under Section 80C.
A great option
The craze for tax planning funds started in 2005 when finance minister P Chidambaram hiked the investment limit in these schemes from Rs 10,000 to Rs 1 lakh. This step threw open the possibility of building wealth through some tax planning. Till then, instruments like public provident fund (PPF) and National Savings Certificates (NSCs) were the most courted by investors. In one year, assets grew by leaps and bounds. From Rs 684.01 crore in March 2005, the tax-planning funds category steadily rose to touch Rs 5,089.90 crore in March 2006. From there on the kitty of tax planning funds kept swelling both in terms of assets under management (AUM) and the number of funds being added to the category. By December 31, 2007, the tax planning category had 29 funds managing Rs 16,500 crore, the largest being Magnum Taxgain with an AUM of Rs 3,782.50 crore followed by Reliance Tax Saver with assets of Rs 2,548.62 crore.
Impressive returns
Over the years, the average return from tax-saving funds on the whole has far outweighed any fixed-income return. The annual category average over the past five years has varied from 110% (2003) to 30% (2006 and 2004). A far cry when compared to the 8% from NSC and PPF and the 8.5% from the provident fund. Besides having the potential to deliver lucrative returns, the lock-in period of three years is considerably less when compared with other tax-saving avenues.
In terms of returns, they compare well with diversified equity funds. The one-year returns (till February 7, 2008) of diversified equity funds were 25.23% while tax-planning category?s returns during this period were 24.86%. Not just one-year returns, the three-year and five-year returns figures are also similar. The three-year return of diversified category and tax planning category were 37.36% and 35.80%, respectively whereas five-year returns for the diversified equity funds and ELSS category were almost same at 47.97% and 47.23%, respectively.
The best of all worlds
If you hate blocking your money for years on end, then this one surely fits the bill. The lock-in period is just three years, one of the lowest among tax-planning instruments. When you sell after three years, you pay no capital gains tax. So you get the tax benefit when investing, you pay no tax on your profits and you get the exposure to equity which is necessary for wealth generation.
A quick look at the portfolios of the category shows that the tax planning funds have increased their exposure to energy and financial services over the past one year. Interestingly, they have been exiting the technology pack in droves.
The sector which accounted for more than 20% of the investments in June 2007 now only corners only 11%. Notably, some funds in the category have started taking an interest in the consumer durables sector, though allocation to this sector remains low at less than 2%.
But you have to play it smart. Choosing a right fund is critical. Take a look at the schemes we have analysed. And, at the risk of sounding repetitive, we would like to remind you that systematic investing is the way to go. By opting for a systematic investment plan (SIP), you invest a fixed amount every month and spread your investments over a period of time. This takes care of the market volatility.
For example, if you had invested all your money in December 2007, you would have paid a higher sum for your units.
But looking at the market crash in January 2008, when the Sensex fell by over 13%, an SIP would have worked very well since those who invested in January would have got more number of units.
Tax saving now?
You may be wondering why we are talking about tax saving funds at the end of the financial year. Our logic is clear: There are probably many of you out there who have still not completely exploited your relief under Section 80C. If you are one of them, then you have time till March 31 to do so. If you already have, then this will be a great preparation for you to get ready for the next financial year (starting April 1, 2008).
The author is CEO, Value Research