Soon after coming to power, the new gov- ernment increased the section 80C limit under the Income Tax Act by Rs 50,000 per an- num to Rs 1.5 lakh, and gave some other incentives to re- tail investors to save more. Under this section, people can enjoy exemptions among a host of heads including equi- ty-linked savings schemes (ELSS)of mutualfunds,prov- ident fund contributions, re- payment of home loan prin- cipalamount,purchaseof life insurance, etc. In the Budget, the finance minister also in- creased PPF limit to Rs 1.5 lakh and home loan interest exemption to Rs 2 lakh
Two of the Budget proposals which could help investors save and invest more are the hike in income tax exemption limit from Rs 2 lakh to Rs 2.5 lakh and also the increase in section 80C limit of Income Tax Act to Rs 1.5 lakh. Together, these two incentives are expected to help investors save and invest more as they will have more disposable income in hand. “It’s a good incentive to save money. So investors should ensure that they invest these extra funds correctly,” said Mukund Seshadri, founder, MSVentures Finan- cial Planners. Financial advisers said that the extra funds should be invested in line with the risk taking ability of the investor.
“Among the options avail- able to investors to save the extra Rs 50,000, ELSS is one of the favourite 80C instru- ments for many,” says Hardik R Joshi of Shrey Advisory Services, Anand. “A lock-in period of just three years, the chance for higher returns and the choice of var- ious schemes from different fund houses make ELSS schemes popular. With the ad- ditional Rs 50,000 at the dis- posal of investors, we believe that if they keep the advan- tages that ELSS come with in mind, they can take dual ad- vantage of Tax Savings and higher returns,” Joshi said.
What are ELSS?
ELSS are Equity mutual fund schemes which, at any given time,investatleast65%of the total corpus in stocks. The bal- ance could be invested in non- Equity assets like Debt, money market instruments, cash and cash-equivalent.
According to investment advisers, ELSS derive their power from being market- linked, which also makes it unique among tax-saving in- struments as returns on other similar instruments like PPF and NSC are fixed on an an- nual basis by the government. ELSS also come with the short- est lock-in period of three years while the minimum lock- in in other assets is five years.
Additionally, being an Equity-oriented fund, long- term capital gains on ELSS are also tax-free in the hands of the investor. In case one chooses the dividend option instead of the growth option, dividends paid by these schemes are also tax-free in the hands of investors.
“Many financial analysts and planners suggest that first- time investors in Equity funds should start their investments with through ELSS,” says Nee- lesh Shah, president of the KarnatakaAssociationOf Mu- tual Fund Advisors. “This in- culcatesthehabitof savingfor the long term and also helps to build a corpus that becomes available after a fixed interval of time,” he said.
How have they performed?
Over the years, ELSS have given strong returns. For ex- ample, according to a financial planner, if one had invested Rs 70,000 in the month of March of every year since March 1996 in one of the best performing schemes, he/she would have invested a sum of Rs 13.3 lakh till March 2014. The present value of the same investment, as on September 1, 2014, would be around Rs 1.60 crore.
If one had invested the same amount annually in PPF, the value would have been Rs 32.04 lakh. “That is the power of market return in schemes like ELSS,” the financial adviser says. These schemes could also be used to create wealth that will be able to beat the current high rate of inflation.
Beware of market volatility
Investors should remember that there are some caveats too. “Those interested in ELSS need to understand that these funds provide a better return than most of the fixed income investments. But there is also the risk of the investment value going down due to the Equity market volatility,” warns Shah. “A staggered approach to these investments is suggested via the SIP route. This would help the investor average out the cost per unit as also build a long-term, stable portfolio.”