The new year seems to augur well for the well-informed investors. Entry loads would be waived for direct applications made on January 4, 2008, or later, as per the recent Sebi circular for mutual fund investing.

For MF investors, who invest either by way of SIP (Systematic Investment Plan) or as bulk investing, it could mean saving quite a sum of money - around 2% of the investment amount. So consider investing directly in ELSS (equity-linked saving schemes) as it could be a smart and cost-effective way to do so. If you dont have the money, churn the existing ELSS portfolio - as entry loads are not applicable for direct investing.

Shuffle strategy
As per tax rules, ELSS schemes are subject to a lock-in period of three years from the day of investing. And since there are no long-term capital gains tax for equity funds sold after a year of purchase, shuffling ELSS schemes practically entails zero costs. How does the shuffle strategy work? Say, for instance, investor A had been investing Rs 50,000 in ELSS every year for the past six years. Since there is a lock-in of three years for ELSS, his/her investment of last two years would not be redeemable. But those investments made more than three years ago could be redeemed and invested back into the fund to gain fresh tax benefits. Section 80 C of the Income Tax Act, allows tax deductions up to Rs 1 lakh of ELSS investment made in any financial year for an individual.

Earlier Section 88 had a condition for claiming rebate that the investment should be made out of the income chargeable to tax. This was subsequently removed to provide relief to the individual tax payers. Current provisions for claiming deduction under Section 80C do not contain this restriction. Therefore, investments could be made out of the current years taxable income or even the past accumulated savings/investments to claim the deduction from taxable income by an individual tax payer, says KPMG executive director Vikas Vasal.

While previously, such reinvestments attracted entry loads, the new Sebi rule has done away with such costs for direct investing. In this investment process though, there is a possibility that the investor might make small profit or losses since the NAV might move up or down during the shuffle process. Such shuffles while helping get tax benefits also gives a chance to have a relook at MF portfolio and prune investments if necessary.

Switching Strategy

There is one more quicker method and that is of switching out proceeds to a liquid fund of the same fund house and switching it back into the fund. Switching refers to the process of transfer of money from one scheme of a fund house to another scheme. While for taxation purposes, such switching is considered as redemption and taxed accordingly, the advantage for investors is in terms of getting NAV of the same day. So for instance, if an investor switches from an equity scheme to a liquid scheme, the same day NAV is applicable.

How does it work ? Say for instance, an investor with previous ELSS investments doesnt have money to make further investment in the current financial year 2008. He could consider switching it to a liquid fund and back into the ELSS fund. There are no loads applicable for doing it if done within a short period (say 10 days or lesser).

The call centre officials of Franklin Templeton MF and ICICI Pru MF confirmed the same for their respective schemes. The recent Sebi rules also state that waiver of loads would be applicable for additional purchases done directly by the investor under the same folio and switch-in to a scheme from other schemes if such a transaction is done directly by the investor. So, this new year, ensure you pocket the tax breaks that the government has given you - of course without shedding an extra penny.