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Equity Linked Savings Schemes

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Welcome to this session on ELSS Mutual Funds

ELSS stands for Equity Linked Savings Scheme.

ELSS are a special type of Equity Mutual Fund Schemes.

The working of an investment in ELSS is similar to that of any other open-ended equity mutual fund scheme except that every investment that we do will have a lock-in of 3-years.

More details on this will be discussed below.

ELSS vs Other Tax-saving options

It is one of the most preferred investment choice for tax saving under Section 80C of Income-Tax Act, 1961 by many tax payers who want to reduce their tax outgo.

Check the Saving tax under Section 80C for a list of other modes of saving tax.

ELSS is more suitable for young tax payers who want to invest in equities and yet save tax.

If you wish to be confined to other equity / stock market-related yet do tax saving at the same time, you will be interested in Retirement Mutual Fund Schemes, National Pension Scheme and ULIPs.

Rajiv Gandhi Equity Linked Saving Scheme was available till last year but that was discontinued from FY 2017-18.

Other tax-saving options like Retirement Mutual Fund schemes and NPS have have longer duration lock-in and the scheme returns might not be as attractive as ELSS.

ELSS Lock-in

Investments in ELSS will come with a lock-in of 3 years from the date of investment.

This means that you cannot redeem or switch-out the investment till it completes the mandatory 3 year period.

For example, if I invested on 10-Apr-2017, the investment will get locked till 10-April-2020.

This means that I cannot redeem or switch-out from that investment date during the three year period.

You will be able to redeem or switch-out the funds only after 10-April-2020.

The lock-in period is same for all ELSS schemes of all mutual fund houses.

Similarly, if I had invested in a Monthly SIP mode and if my investments dates are like 10-Apr-2017, 10-May-2017 etc., the units allotted on 10-Apr-2017 can be redeemed after 10-Apr-2020 and the units allotted on 10-May-2017 can be redeemed only after 10-May-2020.

So, the lockin is applied on each investment that we have made.

ELSS as an investment

ELSS is an "investment" and is "market linked".

This means that, the money we put in will undergo treatment like in any other equity investment.

i.e the returns will fluctuate as per stock market fluctuations.

Never-the-less, it is a good choice for investors who are optimistic about long term investing in Equities.

We can save tax on investments up to Rs. 1.5 Lakh by investing in an ELSS scheme.

One can invest more than Rs. 1.5 Lakh in one or more ELSS schemes but only Rs. 1.5 Lakh portion of your investments will be eligible for tax savings under Section 80c.

Minimum Investment Amount

In a normal equity fund, the minimum investment is Rs. 1000 and in multiples of Rs. 1.

However, in ELSS scheme, the minimum investment is Rs. 500 and in multiples of Rs. 500.

In general, if you are tax payer and selected ELSS for tax saving, consider saving to the fullest of Rs. 1.5 Lakhs.

Also ensure that your investment, whether made in lumpsum, sip or switch-mode are always in multiples of Rs. 500.

Plans and Options for ELSS schemes

Like most other equity mutual fund schemes, ELSS schemes will have the following Plans and Options.

Plans: [DIRECT plan vs REGULAR plan|DIRECT Plan and REGULAR Plan]. I prefer DIRECT Plan so as to get the best possible returns out of the scheme.


  2. DIVIDEND - Payout
  3. DIVIDEND - Reinvestment

I prefer the GROWTH option over DIVIDEND Option.

DIVIDEND Payout is suitable for those investors who wish to do regular profit booking.

DIVIDEND RE-Investment might not be a good option because when Dividend gets re-invested, each dividend amount that gets reinvested will again get a fresh lockin for 3 years from the date of the reinvestment.

GROWTH option allows the investment to stay in the scheme and grow by compounding.

Using Daily STP route

If you have some surplus funds, say Rs. 50k or even Rs. 1.5 Lakh and want to invest every day in ELSS so as to get the best cost-averaging, here is a method.

Invest your surplus funds first in a temporary [Liquid Mutual Fund Schemes|liquid mutual fund scheme] of the mutual fund house in which you wish to do your ELSS.

The investments in the liquid scheme do not carry any entry or exit load which means it be moved out easily.

After the investment is made, give a Daily STP instruction using the online interface of the Mutual fund website.

The funds will move from your temporary scheme to the target ELSS scheme daily and automatically.

This method has two advantages:

1. You will be able to invest in equities on a daily basis. This method does good cost averaging.

2. You will be able to do tax saving on a daily basis. Hence, there will not be any hurry or lumpsum investing in tax saving instruments.

Example of Daily STP

For example, I will invest Rs. 50k or Rs. 1.5L or what ever surplus money I have, first in a temporary scheme such as Reliance Short Term Fund - DIRECT Plan - GROWTH option.

I can do this online from the Reliance MF website.

The next day, after the units gets allotted, I will login on Reliance MF webite again and give a STP instruction.

In the STP instruction, I will specify that Rs. 500 should be moved from the Reliance Short Term Fund scheme to the target Reliance Tax Saver Scheme daily and automatically without our interference.

I specify the start and end dates between which the transfers have to take place.

I ensure that the STP end-date does not cross 31-March of the Financial Year so as to limit my tax saving for this year itself.

Also note that the temporary investment made in Reliance Short Term Fund also will fetch in small gains called Short Term Capital Gains from Debt-funds.

Temporary schemes to do STP to ELSS schemes

  • When we wish to use the STP route (such as Daily STP, Weekly STP or Fortnightly STP) to switch funds from a temporary scheme to the target ELSS, we need to identify an appropriate temporary liquid / debt scheme.
  • There are two types of schemes that you can use for this purpose
    • Liquid / Ultrashort term / short term schemes that do not have exit load
    • Arbitrage Schemes (for those who like Equity investing even for temporary holding of funds)

Some popular temporary schemes are as follows:

  • Axis Mutual Fund
    • If you like equity exposure and have surplus funds which you can use to switch, consider investing first in Axis Enhanced Arbitrage Fund and then channel the funds periodically into Axis Long Term Equity Scheme. There is a 0.25% load if redeemed / switched out within 7 days from the date of allotment. So invest in this first and start your switch after 8th day of the investment.
    • If you do not like equity exposure even for temporary holding of funds but have surplus funds which you can use to switch, consider investing first in Axis Short Term Fund or Axis Banking and PSU Debt Fund and then channel the funds periodically into Axis Long Term Equity Scheme
  • Birla Mutual Fund
    • My preferred schemes for temporarily holding funds are BSL Enhanced Arbitrage Fund if you like equity exposure or Birla Sunlife Floating Rate Fund - Long Term Plan - Direct Plan if you like debt exposure.
  • DSP Blackrock Mutual Fund
    • If you have some temporary funds available right now, consider DSPBR Short Term Fund - DIRECT Plan - Growth Option.
  • Reliance Mutual Fund
    • Reliance Short Term Fund, Reliance Liquid Fund - Cash Plan, Reliance Income Fund, Reliance Banking & PSU Debt Fund are debt schemes that do not have an exit load. Risk-averse investors can consider parking their Rs. 1.5 Lakhs in one of the debt scheme and then switch / STP to Reliance Tax Saver.
    • Those who love equity even for temporary parking can first invest in Reliance Arbitrage Advantage Fund and then switch / STP to Reliance Tax Saver.

Returns from ELSS

ELSS are Equity mutual fund schemes.

So returns depend on a number of factors including stock market performance, fund manager performance etc.

Though the equity markets give short term fluctuations, on the long term, they tend to perform well and gives better returns over most other asset classes.

When to start ELSS investing?

Since ELSS is a type of equity investment, the prevailing market conditions will a great impact.

Hence, it is always better to spread the investment over a period of time instead of doing a lumpsum purchase so that we can invest at different price / time intervals and get the benefits of cost-averaging.

The best time to start investing in ELSS is the beginning of the year.

However, it so happens that many investors forget this and often start in the middle of the year, some in December and few even in March.

Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted

- Sun Tzu in Art of War

Identifying good ELSS schemes

The first thing you need to determine is how much time you have to invest and how much should you invest.

For instance, today is 10-Feb-2017 and we have like 50 days left to invest before March 31. This means that you need to invest 3k per day!

In such situations, when time frame is less, it is better to go for other tax saving avenues such as PPF or tax saver FD or NPS etc. But they have higher lock-in periods compared to ELSS.

I generally go with one ELSS scheme per year rather than diversifying across fund houses. Good or bad, I will stick to it.

The rationale is that, since ELSS carries a 3-year lock in, we end up having folios of several mutual funds and each of them will have three year lock-ins.

Further, it is always better to keep our tax-planning as simple as possible. When our investment is being questioned at the time of a tax assessment, it becomes easier to explain.

Some good tax savers in current market conditions (April 2017) are:

  • Birla Sun Life Tax Relief 96
  • DSP BlackRock Tax Saver Fund
  • Reliance Tax Saver Fund

What to do when the ELSS scheme is under performing?

There are several strategies that one can follow when it comes to ELSS investing.

One strategy is to review all ELSS schemes at the beginning of the year and invest in one of the best among them.

Another strategy would be to pick one scheme and use the same for ever year.

For existing investors who already started investing in an Elss scheme that is not performing as per expectations, it will be wise to keep investing in it so as to get the advantage of cost averaging despite the dull returns in the scheme in recent times. Review the scheme and try to understand the reason for the under-performance and if see if it can catch up.

Can HDFC Midcap Fund be used for tax saving?

If I buy HDFC Midcap growth mutual fund, can it be used for tax saving?

No. HDFC midcap growth is an equity scheme but not an ELSS scheme. So it cannot be used for tax saving under Section 80c

One ELSS for the entire 3 years?

There are several strategies one can use when planning their ELSS. One such strategy is to pick one scheme per FY. Review the scheme again in the next financial year and if good, continue with it else go for a new ELSS scheme.

For instance, I might have started with Axis ELSS for this FY, i will SIP / invest in it till March 31, 2017. I shall review all ELSS schemes once again and then pick the same or another scheme for next FY ie FY 1718 in the first week of April 2017.

Reusing funds from ELSS after 3 year lock-in

Most investors invest in ELSS solely for the purpose of tax-saving. Of course, since ELSS schemes are multicap schemes, they can be good wealth creators too.

However, human psychology of most investors is as such that they want to use ELSS only for tax saving.

In general, investing in one ELSS scheme is a good enough and it works for our advantage too. Here is the rationale.

Assume I have invested Rs. 1.5 Lakh of my tax saving portion of Year I in an ELSS scheme.

I do this for the next two years as well.

So, at the end of three years, I would have made an investment of Rs. 4.5 Lakhs.

In the 4th year, for your tax saving portion, if you have funds in hand, you can continue to invest in the same scheme.

But in case you are out of funds and since tax saving is an important task that you have to do, you can switch out the first year investment of Rs. 1.5 Lakh (as and when the units complete the 3-year lock-in) from the ELSS scheme to a Liquid scheme.

Remember, we are switching-out and not redeeming.

Switching of funds is moving funds from one scheme to another. Redeeming funds will mean the money will come back to your bank account.

Now, the switched-out funds from the liquid scheme can then be re-invested using STP or Switch method from the Liquid scheme to the same ELSS scheme.

These investments that you make by STP or by Switching during the year qualify for your tax saving for the year.

So, your 4th year ELSS needs are met by re-using the funds from the investments made in the first year.

In this manner, investing in one ELSS scheme for 3 years will generally meet the corpus for your entire life.

The catch in this process is that the scheme should always give positive returns all the time so that at any point of time, the value of the fund does not fall below Rs. 1.5 Lakh.

Hence, it is better to go for GROWTH option rather than DIVIDEND option for ELSS investing.

DIVIDEND option books profit from the scheme and dividend is given to the investor and hence the scheme value falls to the extent of DIVIDEND payout.

ELSS and timing the market

Market is going high now days... So we have to invest in ELSS or wait for some days for down market ???

  • Do not time the market for ELSS since it is a 3+ year investment.

However, spread your ELSS investment in what ever time available from now till March 31.

  • Date: Feb 25, 2017

It is Feb-end and 50k to invest. Still hook to Axis MF?

I have done elss in Axis MF. Now i hav to do 50k for my wife. Should i go with axis mf itself?

  • Continue with Axis Longterm Equity Fund. Direct Plan - Growth option.
  • Invest like 10k per week for the next 5 weeks.
  • My hunch is that Axis is recovering and is now on par with other ELSS in terms of performance in weekly and monthly returns.
  • Also we will not be deviating from the 1 elss scheme per year rule we framed.
  • Date: Feb 27, 2017

Views on Mirae asset tax saver fund

  • It is undoubtedly a good but it only a recent performer.
  • However, its AUM low. Markets rallied well and so did the scheme.
  • Not sure how it will perform in a down trending market.
  • Dated: Feb 21, 2017

Rs 1 Lakh in ELSS before March 31, 2017

  • Investing gives good returns when it is given time. So, always use ELSS investing right at the beginning of the financial year and not at the end.
  • That said, now that we have very less time before March 31, 2017 and you still wanted to go for ELSS, here is what I feel.
  • Invest in Rs 5k in Birla Sunlife Tax Relief 96 today and Rs 5k in Reliance Tax Saver tomorrow. Repeat this process by investing alternatively between the schemes till this Rs 1 Lakh investment target is met. If you cannot do this is too difficult for you, do it with 10k once a week
  • Dated: Feb 21, 2017

Best tax saver from BSL MF

One of my friend advised me to invest a lumpsum amount of rs. 1 lakh in mutual fund of birla which is for 3 year and it is a tax saver. Will u plz tell me about this.

  • Need exact name of scheme to decide. BSL has two ELSS schemes. Also, are you investing for the sake of tax saving ?
  • Since time is less from now to March 31, 2017, invest like 15k per week under its DIRECT plan - GROWTH option over lumpsum investment
  • Lumpsum investments are risky. The longer and frequent you can spread your investment, the better it will be.
  • You can invest lumpsum in an arbitrage / liquid debt fund and give a STP instruction to switch to a target ELSS scheme but since for this FY, time available is less, you need to do something like manual investing for now. You can plan this lumpsum-STP thing for next FY. i.e in April 2017.
  • Dated: Feb 24, 2017

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