Time to give a serious thought to tax saving funds
March, 21st 2016
The Budget is something that is eagerly awaited by every person in India. For the salaried class, their biggest hope every year is that the Government would provide them with more opportunities to save taxes. However, the same enthusiasm is not seen when they have to actually save taxes, as the HR Department in the organizations have to virtually pull up their employees to present the necessary investment proofs. It is then that the employees start running from pillar to post scouting for the best investment options to consider for saving their taxes. The situation remains the same year after year and the month of March becomes a daunting one for employees. By the fag end of the month, investments are made into any of the instruments included under Section 80C without much thought on the pros and cons of the said instrument. Saving taxes is an exercise that we will have to do on a regular basis, but the question that the investors need to ask themselves is “should investments be made into tax savings instruments just for the sake of it or do they need to actually think on how these instruments can help them in achieving their goals or create wealth for them in the long run”.
Section 80C is filled with investment options which give investors either instruments offering fixed returns or a combination of investments and insurance. However, my endeavor in this column is to throw light on an instrument which will not offer assured returns but will move ahead as per the vagaries of the market. Here I am referring to Equity Linked Saving Scheme (ELSS), wherein the entire surplus is invested into equities. It is also the most volatile instrument included under Section 80C. Investors would then wonder “Given the volatility, why should I consider this option?” My answer is that, although equities might be volatile, over a period of time they have been known to create wealth for our investors. It must also be noted that although ELSS has a lock in period of 3 years, investors are under no obligation to redeem their investments after 3 years. ELSS can be a part of the investor’s core portfolio and can be held on in order to achieve their goals in the long term.
My endeavor in this column is to throw light on why ELSS is a good option as compared to other instruments included under Section 80C.
Equities will be volatile but the Indian market is attractive
As I write this note, our markets are in a very volatile phase and obviously investors would be worried about the way forward if they invest into ELSS at this stage. Despite all the fluctuations, we continue to be positive on Indian equities and our stand has been on these lines.
We believe that the biggest USP for the Indian markets is the combination of a government that is taking incremental steps which will lead to a complete overhaul of the economy in the coming years and a pro-active Central Bank whose priority is to reduce inflation without compromising on growth. The Government and the Reserve Bank of India (RBI) are taking measures to clean up the mess in PSU banks, which is one of the major issues that India is facing today. This along with the improving macro-economic fundamentals and the attractive valuations should give the confidence to our investors in taking exposure into the markets. This is a better alternative than waiting on the sidelines for an appropriate opportunity to enter the markets.
A risky proposition but investors will be rewarded in the long run
As ELSS invests the entire surplus into equities, the investment will also be volatile depending on the movements in the market. The performance of our Recommended ELSS over a time period of 3 years to 5 years is given below to show how this category has rewarded our investors.
Given data is as on March 15, 2016. Source: iFAST Compilations
One of the favorite investment options of Indian parents since ages have been the Public Provident Fund (PPF), their children carry on the tradition by continuing to invest into this instrument even today. PPF can definitely be one of the investment options, but it can’t be the only tax saving option for the salaried class in India. During the last few years, the rate of interest on this instrument has been in the range of 8.6% to 8.8% and for the Financial Year 2016, it is at 8.7%. We need to ask ourselves if this return would be enough to meet the major goals in our lives considering the huge differences in the lifestyle of our parents and ourselves.
Points to keep in mind while investing into ELSS
1. Investors should start investing into ELSS at the beginning of the financial year. This will allow them to do an SIP into ELSS without stressing themselves about the direction of the markets. This strategy will also be lighter on their wallets, as it will not stretch their finances at the fag end of the year. 2. If the fund is performing well, then redemption should not be done once the lock-in period is over. 3. Investors should invest into the ELSS depending on their risk profile. This means that if the investor’s risk profile is aggressive, then he/she should scout for a fund that has a major share of it invested into the mid and small cap space.
4. Investment into ELSS should not be included in the portfolio just to save taxes, but should help the investor in achieving his/her long term goals.
Before concluding, I would like to give a quick update about the ELSS category available in the industry. The total AUM garnered in ELSS as on February 2016 stood at INR 36,409 crore, while the total asset base of the industry was to the tune of INR 12,62,842 crore. This means that the share of this category in the overall assets of the industry is only 2.88%. This clearly shows the investors’ apathy towards investing into ELSS. If this is not the case then another plausible explanation for this sad state of affairs could be that investors are able to meet their INR1.5 Lakh investment limit under Section 80C by using the other options included under this section such as life insurance premium, repayment of housing loan, payment of tuition fees of children, and so on. If this is the case, then the Mutual Fund Industry needs to sit down with policy makers and find out means to encourage investments into this instrument. While the captains of the industry can take a call on this, our investors can focus on taking an exposure into this instrument before the financial year ends. My advice to the same investors would be to start investing into ELSS from the beginning of the coming financial year to avoid the last minute rush to get into this instrument.
iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.