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Benefits of starting SIP in ELSS in April

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

Click here to read my article in Mid-day Gujarati edition ...

The English translation of the article is as under:

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

One of the things that we can consider doing is to start planning for saving taxes right in the beginning of the year. In case if you avail the services of a good financial advisor, you must be taking care of this already. In this article, we will talk about how one can benefit out of some brilliant strategies that help achieve multiple objectives.

As we all know, we can get tax benefit under section 80C of the Income Tax Act upto Rs. 1,50,000 per year. There are various avenues that allow us to take this benefit. One of those avenues is the ELSS – Equity Linked Savings Scheme.

What is ELSS? How does it work?

ELSS, or Equity Linked Savings Scheme is a mutual fund scheme that invests in equity shares. It is generally a diversified portfolio, i.e. the money is invested across various companies and industries. The NAV of such a scheme moves in line with the average movement of the prices of shares in which the scheme has invested money. In some of our earlier articles, we have already highlighted the benefits and risks of investing in equity mutual fund schemes. We would request you to understand the risks before you invest your money. However, equity funds could be quite useful when you have some long-term financial goals to achieve. While the biggest risk in investing in a diversified equity fund is the price fluctuation, such an investment has the potential to provide protection against inflation – the rise in prices of items we consume.

This means, equity can help us fight one of the major risks in one’s financial life – price inflation. However, as a trade off, one would be exposed to the other risk, that of price fluctuations.

This risk of fluctuation in the prices of investment has certain interesting characteristics. First of all, price fluctuation is a big risk if someone is investing for a short period of time. However, the same is quite low when the investment horizon is long. Second, there are certain investment strategies that help an investor manage this risk – in fact, make this risk work in the favour of the investor. 

We will highlight this strategy here. It is not a new one, but already discussed in a few earlier articles – SIP or systematic investment plan. This is an investment plan that is available in almost all mutual fund schemes. All ELSS offer this facility. Under SIP, an investor can make periodic investments – the most convenient being monthly. 

SIP helps an investor manage the cash flow since majority of us have a monthly income and hence monthly savings. This can be very conveniently and efficiently invested in an equity scheme to achieve long-term goals. At the same time, regular investment of a fixed amount turns the risk of price fluctuations in favour of the investor. 

As we know, the number of units purchased would be equal to the amount invested divided by the prevailing NAV. Hence, when the NAV is high, we get fewer units and when it is less, we get more units. Thus, even the most ignorant of the investors benefit due to this inherent characteristics of SIP. 

Now, if you start an SIP in an ELSS in the month of April, you get multiple benefits:

1. Investment in equity fund (ELSS is an equity scheme), can help one achieve long term financial goals
2. Investment in ELSS helps one reduce the tax liability since this is eligible investment under Section 80-C of the Income Tax Act
3. SIP in an equity fund help one turn the price fluctuations in one’s favour.
4. Monthly investment eases the cash burden by spreading the investments monthly. This ensures that one does not have the year-end pressure
5. ELSS comes with a 3-year lock-in period. Holding onto your investments for that period ensures the capital gains would be tax-exempt. 

So go ahead and start your SIP this month and reap multiple benefits.

• Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions. 

Chat transcript - 14th Dec, 2015

Below please find link to the transcript of my chat session on www.moneycontrol.com on 14th Dec, 2015

Equity investments simplified

Transcript of chat today on www.moneycontrol.com

Equity investments simplified

SIP in ELSS - a good way to save taxes right from the start of the financial year

My article on the highlighting the benefits of starting early in the financial year to plan for saving taxes ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/13042015/13042015-md-gm-11.pdf

The English translation is as under:

Someone has aptly said, “If you want to sell something to a man, tell him there is a tax benefit.” We all love to save tax, even if we have to spend more than the tax saved, sometimes. Well, on a serious note, in order to promote a certain behavior the Government offers some incentives in form of tax rebates.

One such incentive is in the form of tax deduction under Section 80C of the Income Tax Act. Among other alternatives eligible under this section, we covered ELSS in one of our earlier articles. We would like to repeat the importance of this investment vehicle. Someone may think, why now? Shouldn’t we worry about the tax saving in the end of the year?

Well, we have observed over the years that the tax deductions from salary start towards the end of the year as the companies assume the employees would (and should) take their time to plan out whether and how to save taxes.

We think, some simple things are possible to start doing. All of us know the limit under Section 80C of the Income Tax Act is Rs. 1,50,000 per year. We all also can estimate the PF deduction, our annual insurance premium amount, etc. Based on this, it is easy to arrive at the limit available for other avenues, of which ELSS is one.

If you have made your overall financial plan – either yourself or with the help of a professional – you also know how much contribution you need to make towards equity investments.

Let us assume that you have the entire limit of Rs. 1,50,000 available for ELSS and your financial plan also requires that you invest that much in equity for the year.

Given that, it is easy to invest a sum of Rs. 12,500 every month into ELSS rather than putting a sum of Rs. 1,50,000 at one go. First of all, one may not have that much saving in one go. Secondly, putting a large sum in one transaction carries the risk of entering the stock market when the prices are high. As against that, the same also may provide an advantage if the entry happens to be at a very low price. Should one take that risk? Is it prudent? If one has a reasonable knowledge to identify market tops and bottoms, the strategy to invest in one go might be a good idea; if not, it could be disastrous.

Most of the retail investors do not have the skills to know if the market is currently high or low. With that limitation, it is prudent to spread one’s investments. In one of the earlier articles, we also talked about systematic investing and its benefits.

Combine the above points and the picture is clear. We are recommending that one may consider investing systematically in ELSS schemes through SIP. Starting this process in April reduces the burden at the end of the year. Such a strategy allows one to invest in equity, spread the investment monthly and thus reduce the burden, take the advantage of price fluctuations in stock markets and avail the tax benefit – all through one simple plan.

However, one needs to keep a few things in mind. One, ELSS is an equity linked savings scheme. Please understand that you are investing in equity markets. Go with proper understanding. Two, units of ELSS schemes are locked-in for three years from the date of allotment. Hence someone investing in ELSS through SIP route must understand that each investment would be locked in for three years from the respective investment date. The lock-in does not end three years after the first investment for all your units.

Plan to save taxes, start as early as possible and have a wonderful 2015-16 ahead.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.

ELSS - benefit of equity investing along with tax saving

My article on ELSS in Mid-day Gujarati edition today.

Here is the link



Below please find the English translation

Mutual funds were not invented in India. However, we have some variants that one won’t find anywhere else in the world. These funds came into existence with an objective of promoting investments by retail investors into equity markets. We will talk about the two variations available only in the Indian market, viz., Equity Linked Savings Scheme (ELSS) and Rajiv Gandhi Equity Savings Scheme (RGESS).

While ELSS category has been in existence for many years, RGESS is a new entrant. Both are essentially equity mutual funds, but come with certain restrictions. Today, we will discuss about the merits and demerits of investing in ELSS.

Equity Linked Savings Scheme is a type of mutual fund that invests in equity shares and equity related instruments. An investor can invest upto Rs. 1,50,000 per year (As per the Union Budget 2014) to avail benefit of Section 80C of the Income Tax Act. The taxable income is reduced to the extent of amount invested (subject to the limit mentioned earlier) in ELSS. There is also a lock-in for a period of three years.

Since ELSS is a equity-oriented as defined by the income Tax Act, the dividends received from the scheme as well as long term capital are exempt from income tax as per the current provisions. Thus, apart from the reduction in tax, the investor also enjoys tax-exempt returns from the scheme. However, care must be taken to understand that these are equity funds and hence are subject to the volatility in the stock markets.

Does it make sense to invest in this scheme in spite of the price fluctuations?

First of all, the scheme comes with a lock-in of three years and hence the price appreciation, if any, would be considered long-term capital gain. As per the current laws, such long-term capital gain is tax exempt.

Second, due to the lock-in, an investor cannot exit the scheme before completion of three years. This means, there is no liquidity to the investor for a period of the lock-in. at the same time, this is not a close-ended fund and hence one can continue to stay invested in the scheme beyond the lock-in period. Since financial advisors recommend investment in equity mutual funds for long periods, the lock-in automatically makes the investor wait for at least three years before taking the money out of the scheme. A disciplined approach to using ELSS for tax saving can go a long way in helping the investor create wealth through the power of equity investing.

Third, since ELSS is an open-ended mutual fund scheme, one can start saving tax from April, the first month of the accounting year, instead of waiting for the last moment. SIP in ELSS ensures that the investor does not get burdened by tax planning in the last months of the year. It also ensures that the investor gets the benefit of Rupee cost averaging. (We discussed the benefits of SIP in one of our earlier articles).

At the same time, if an investor has already planned for saving tax through other means, viz. EPF, PPF, insurance premium, home loan EMI, etc., one may avoid ELSS and invest the money in an open-ended equity mutual fund without lock-in.

As a word of caution, ELSS is an equity linked investment and hence one must plan carefully before investing in this scheme.

Happy tax planning.

-       Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at amit@karmayog-knowledge.com.