1. ELSS treated like equity funds for tax purposes; dividends tax-free

ELSS treated like equity funds for tax purposes; dividends tax-free

Equity-linked savings schemes (ELSS) are categorised as equity funds...

Updated: February 3, 2015 1:10 PM

Do I need to pay tax on dividends from from ELSS?
—Arvind Saxena

Equity-linked savings schemes (ELSS) are categorised as equity funds for taxation purposes and dividends from equity funds aren’t subject to tax, irrespective of whether one selects the dividend payout or re-investment option. In other words, they are tax-free both at a fund level and in the hands of the investor. In terms of options, you can select the dividend payout option. Assuming you don’t require that cash flow, you can select the growth option. Alternatively, fund houses provide the option of dividend transfer wherein the dividend amount, once declared, would be transferred to another (selected) scheme of the fund house. This comes with conditions like a specific source and target schemes, minimum amount, etc.

Will the fund house impose a charge on switching from a non-performing scheme to a performing fund?
—Swastik Sharma

Typically, no fee is levied on switching of investments from one fund to another within the same fund house, irrespective of performance. But if the switch-out happens during the exit load period, as defined for a particular fund, the applicable charges would be payable.

How can I get better returns from balanced funds? How do I select one?
—Harender Singh

Balanced funds typically invest 65-75% in equity and the rest in debt instruments. The equity allocation is expected to generate higher returns or capital appreciation over the medium to long term (3-5 years) whereas the debt allocation is expected to generate steady returns and provide some cushion to the volatility of the equity portion. From a risk-return perspective, balanced funds are closer to equity funds than debt funds, although with lower volatility. Therefore, they are suited for an investment horizon of 3-5 years and for investors with a moderate risk appetite.

There are a number of balanced funds available, and the parameters used for selection would be broadly similar to other categories of equity funds. The typical parameters one can look at include risk-return ratios such as Sharpe ratio; Information ratio; performance of the fund over the longer term, i.e., at least 3-5 years, and not just past one year that investors tend to inappropriately focus on; fund manager quality in terms of experience in fund management; and consistency of performance. Additionally, for balanced funds one can study the investment mandate/strategy to understand the maximum exposure to equity that the fund can take (which will determine its volatility). On the debt side, whether the fund can or has taken exposure to debt across maturities or is it only short term debt – exposure to long-term debt can further increase the volatility of the fund, although if managed well can also help generate alpha.

Do I get tax benefits on ELSS only once? Do I have to invest the same amount of money every year?
—PK Saha
Tax benefits on ELSS, i.e., under Section 80C, are available only during the financial year in which the investment is made. The choice to invest the same amount each year is yours. Currently, Section 80C allows tax benefits on investments up to a total of Rs 1.5 lakh.

Do gold ETFs have a lock-in? Can I redeem and invest in an equity fund?
—Somesh Rao
There is no lock-in for investments in gold ETFs. They are listed on the stock exchange and can be traded like a stock. One can buy and sell them either through a broker or a trading platform. They are fairly liquid though the trading volume varies across ETFs.

By Dhaval Kapadia

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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