Difference between revisions of "Equity Linked Savings Schemes"

Revision as of 20:49, 17 June 2017

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.

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.

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

If you wish to be confined to other equity / stock market-related yet tax saving options, 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 this FY (2017-18).

But they have longer duration lock-in.

ELSS Lock-in

ELSS lock-in is for 3 years only from the date of investment.

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

This means that you cannot redeem or switchout 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.

ELSS as an investment

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

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

i.e the returns will fluctuate as per stock market price fluctions.

Never-the-less, it is a good choise 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.

Using Daily STP route

If you have some surplus funds, invest first in a temporary liquid scheme.

And 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 as well on a daily basis. Hence, there will not be any hurry or lumpsum investing in tax saving instruments.

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

From the Reliance MF website, I will 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.

Also note that the temporary investment made in Reliance Short Term Fund also will fetch in small gains.

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.

ELSS investments, on an average, gave 24% returns in the past 1 year.

When to start ELSS investing?

This is why we need to invest at different price / time intervals so as to cost-average.

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 lockin periods compared to ELSS.

I generally go with one ELSS scheme per year rather than diversifying across fund houses. Good or bad, will stick to it. The rationale is that, since ELSS carries a 3-year lock in, we end up having folios of serveral mutual funds and each of them will have three year lock-ins.

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

Personally, I am invested and have suggested Axis Longterm Equity for this FY. But apparently it is not performing that good. I am still sticking to it.

Would you stick on Axis ELSS for 3 years?

There are several stragies 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 amongst them.

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

For existing investors who already started investing in Axis Elss, it will be wise to keep investing in it so as to get the advantage of cost averaging depsite the dull returns in the scheme in recent times. The scheme is a good one and will catch up shortly.

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.

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 ???

• Dont 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 undoubedly a good but a recent performer. Low AUM. Markets rallied well and so did it. 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

Other topics

• List of eligible tax saver ELSS schemes is available at https://www.valueresearchonline.com/funds/fundSelector/default.asp?cat=18&exc=susp%2Creg%2Cclose
• Do not look exclusive for returns because ELSS journey is for a minimum of 3-years. Schemes with moderate returns, reasonable fund size, low expenses and charges tend to perform better in the long term

Related Lessons

• Advance Tax - Who should pay? Due dates etc.
• Tax on receiving gifts
• Tax-free income
• Liquid Mutual Fund Schemes
• Arbitrage Mutual Fund Schemes