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ELSS could be the accelerator to an equity portfolio
Published On , 13 Dec 2016 By Times Of India
Salaried people who come within the applicable tax brackets for their tax obligations to the government, are required to pay a large part of their taxes before the end of the financial year in March. However, to lessen their tax burdens and to promote certain types of investments, the government also allows them to invest in some notified Tax Savings investments and financial products.
For every tax payer, the ideal situation should be to plan their Tax Savings options at the start of the financial year and continue through the next 12 months. However, a large number wait till the last few months of the year to select and start investing in Tax Saving products. This, in turn, may have negative implications in the tax payer’s portfolio in the long run, financial planners say.
Of the several Tax Saving plans which are available in the market, financial planners and advisors say that the ones offered by mutual funds, which are also called Equity linked savings schemes (ELSS), ranks among the top in terms of flexibility, the chances of higher returns and lockins (All Tax Saving products come with some lock-in time and in an investor wants to withdraw the invested amount within the lock-in period, he/she loses the tax benefits that had accrued).
At present fund houses offer two types of ELSS. One is an open ended structure within which investors can enter and exit as and when they want. The lock-in clause, however, holds. The other structure is where the initial investors are locked-in for three years and post the end of lock-in, they are allowed to redeem their investments. But again, fresh investments, even if the scheme continues to give superior returns, is now allowed.
In the second option, the investor remains invested in the scheme for the whole period of lock-in duration. The fund manager, on the other hand, gets a free hand to invest in stocks of his/her choice which he/she thinks could give superior returns over the three year period. In this way, the fund manager is much relieved by not thinking about which all stocks to sell in case there is any redemption pressure.
OBJECTIVE TO INVEST IN ELSS
According to fund managers and financial advisors, the prime motive for investing should be to grow one’s wealth. “For this, one should look at asset allocation. Tax Saving should be the accelerator,” said a top official at a large domestic fund house.
It works this way: Suppose as an investor your asset allocation plan allows you to invest in an Equity fund. On top of that you also have the option to invest in Tax Saving products to save some taxes. Now the Equity fund you select is an ELSS which is expected to give an annual return of 15% over the long run. On top of this, by investing in this fund you can get an additional benefit of say 3% (because of lower tax outgo). So the total long term return could add up to 18% per annum on an average, explained the fund house official.
“If Tax Savings is your primary objective while investing in an investment product, the returns may suffer. For example, bank FDs which qualify for Tax Savings given lower returns than equities can offer in the long run,” the official said.
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