Investors took advantage of the extension offered by the Centre on tax-saving investments for FY20 and many have already started investing for FY21.
Net inflows in equity mutual funds last month were the lowest in four years— Rs 241 crore in June as compared with Rs 5,257 crore in May—as the recent rebound in the market prompted many retail investors to redeem money from their funds. Even inflows through systematic investment plans (SIPs) fell to Rs 7,927 in June as compared with Rs 8,123 crore in May, suggesting investors have gone for profit booking because of the rise in the markets or have simply paused their investments because of the cash crunch.
Within equities, while multi-cap and large-cap funds have reported net outflows of Rs 778 crore and Rs 213 crore, respectively, equity linked savings schemes (ELSS) have reported net inflows of Rs 587 crore—the highest during the month amongst all categories of funds.
Himanshu Srivastava, associate director – manager research, Morningstar India, says with the deadline for tax-saving investments extended due to Covid-19 pandemic, investors got more time to plan their tax saving investments and are now investing. “Additionally, with markets at attractive levels, many investors would have already started their tax saving investments for the current financial year, which is a positive trend,” he says.
In fact, the flows in ELSS saved the overall net flows for equity schemes going into negative in June 2020. Omkeshwar Singh, head, RankMF, Samco Group, says the flows in June 2020 in ELSS was because the cut-off for Section 80C tax benefit for financial year 2019-20 was extended to June 30, 2020. He notes that if an investor is looking for a tax-saving product, then ELSS is fine. Otherwise, there are a few quality funds in multi-cap, large-and-mid caps and thematic funds categories which are currently better positioned.
Tax savings, long-term goals
For many individuals, ELSS is a popular tax-saving investment option as it qualifies for tax rebate under Section 80C for investment up to Rs 1.5 lakh. While ELSS has the lowest lock-in period of three years as compared to other tax-saving instruments (under Section 80C) such as Public Provident Fund, National Savings Certificate and 5-year bank fixed deposits, an investor must understand what the expectations are. An asset allocation will help you take tactical and strategic calls in the portfolio. For instance, every time you invest in an ELSS fund, it will get locked in for three years. Ideally, investors in equity should look at a horizon of three to five years.
In ELSS, the minimum investment limit is Rs 500 and there is no cap on the maximum amount of investment. However, the tax benefit will be only on investment up to Rs 1.5 lakh a year. You can invest a lump sum amount or invest every month through SIP. In fact, an SIP works best in falling markets when an investor is able to buy more units. However, this being an equity-linked fund, there is no guarantee of returns as in PPF as returns mirror the stock markets and the financial sentiment of the market in general.
Fund management and taxation
In ELSS, you don’t have to look at the performance of individual stocks regularly. The investment is done by the fund manager in diversified stocks and sectors, which reduces the risks in case of any cyclical markets volatility. However, returns fluctuate depending upon the performance of the equity market and the stock selection of the fund manager. Also, there is flexibility in ELSS investments as you can change the plan or shift to a different fund.
In ELSS, like all equity-linked schemes, long-term gains booked up to Rs 1 lakh in a financial year after one year is tax-free. Gains over Rs 1 lakh per financial year will be taxed at 10% per annum. So, as many individuals prepare for tax savings, ELSS can be a good option to not only save on tax, but also earn higher long-term returns.