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Still keen to invest in tax-saving ELSS mutual funds? Do so with a long-term view
April, 15th 2013

Diligent salaried employees are busy with their tax planning for the new financial year. Many of them are in the process of finalising avenues to invest under Section 80C, which will give them tax deduction of up to Rs 1 lakh. Over the years, many individuals have started investing in equity linked savings scheme (ELSS) or tax-saving mutual fund schemes under Section 80C.

In fact, stock market pundits used to claim that ELSS has become the vehicle for most first-timers in equity investments. This is because most financial experts used to advocate investing whatever left after the compulsory contribution to employee provident fund (EPF) and term insurance premium in tax-planning mutual fund schemes.

However, the performance of ELSS funds has been a cause for concern lately for investors. According to Value Research, a mutual fund tracking firm, the ELSS category has delivered a mere 1.28 per cent in the last three years, and 4.13 per cent in the last five year. No wonder, many investors are not keen to invest in ELSS this year. "Investors who are not comfortable with equities can opt for safer products under Section 80C such as the public provident fund (PPF)," says Anup Bhaiya, MD & CEO, Money Honey Financial Services.

NOT FOR FEEBLE HEARTS

Many experts share the view because most of them believe that the stock market is likely to be volatile for some more time. Look at the current mood in the market: The Sensex is trading at 18,300, which is 15.5x estimated 2012-13 earnings; macro economic data has been poor; GDP growth of 4.5 per cent; high current account deficit of 6.7 per cent ... the negative list is too long. With corporate earnings growth expected to be poor and an election year ahead, a further downside in the equity markets cannot be ruled out. "There is no growth visibility as far as corporate earnings are concerned for the next 12-18 months. If corporate results are bad, the market could slip by another 5-7 per cent," says Madhumita Ghosh, head of research at Unicon Financial Intermediaries.

However, there are many market participants who believe that the market may turn around in the next two years. They believe that investors who can digest the shortterm volatility and are ready to take the risk can invest in equities with a time frame of more than five years. "Most economic factors that are hurting the economy like low GDP growth, high interest rates, high inflation and current account deficit and high oil prices will reverse over the next 12-24 months.

The Sensex is trading at 14x 2013-14 estimated earnings making valuations attractive. Given this, investors could be rewarded well if they stay invested in equities for more than three years," says Sadanand Shetty, senior vice president & fund manager, Taurus Mutual Fund.

Oil prices are on their way down. From $119 a barrel in February 2013, brent crude is now down to $102, a drop of 16 per cent. This could help bring down the current account deficit as well as inflation. With IIP registering a growth of a mere 0.6 per cent for February 2013 and GDP growth at 4.5 per cent, there are hopes of a rate cut happening soon.

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