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Use ELSS for tax planning, long term wealth creation
Published On , 23 Feb 2016 By Times Of India
It’s that time of the year when taxpayers rush to either invest in or buy a some financial products which will lessen their total tax burden once the financial year ends on March 31. There are several financial products which are approved by the government, investing in or buying which allow taxpayers to save taxes under section 80C of the Income Tax Act (See box below).
One of the popular investment products is the Equity linked savings plans (ELSS), the mutual fund schemes which have been or are being floated by fund houses that allow one to invest, for Tax Saving purpose, up to Rs 1.50 lakh per annum. Once invested in an ELSS, the tax payer does not have to pay any income tax on an equal amount from his/her total taxable income for the year.
THERE ARE SEVERAL ADVANTAGES OF INVESTING IN AN ELSS WHICH INCLUDE:
You can invest up to Rs 1.50 lakh/year to save on taxes
These funds show less volatility that most other Equity funds
You can opt for monthly SIP to lessen the burden of onetime investing
Three-year lock-in is the lowest among Tax Saving instruments
Advantages like lower cost, lower risk which are common to MF investing
Investors are, however, yet to capture the full potential of these Tax Saving schemes. According to a senior official with a domestic fund house, investors have mostly underplayed the advantages of ELSS. “In addition to the tax advantages, ELSS also come with low volatility,” the official said.
Since the funds in an ELSS come with a three-year lockin, the fund manager has to worry less about any probable and sudden outflow from the fund, an advantage that most other Equity fund managers do not enjoy. This threeyear lock-in gives it some extra stability.
The fund house official also pointed out that unlike in regular Equity schemes, not many large investors invest in ELSS schemes. So in these schemes the chance of a sudden and large-ticket exit by a very big investor, which can destabilize the fund manager’s long term investment plan before time, is that much less. “This also brings in some extra stability to the (ELSS) fund,” the official said. Of late fund houses are considering launching long term ELSS where the fund manager could invest in a concentrated manner, that is investing in a select few stocks, which at the current market situation are valued much lower than their intrinsic value. What that means is that once the market is back on track these stocks could give returns higher than the average market returns. Also these stocks have the potential to give returns higher than their peers, industry players said.
According to fund industry player, many of the stocks, which inherently are quality stocks, are currently valued at huge discounts to their true values and markets can realise their true potentials only in the future when the current bear phase is over. Investing in such a fund has the potential for wealth creation as well, they said.
While investing in an ELSS, investors should be mindful of the fact that in these funds there is no guarantee for return. However, if one looks at the long term trend, he/she can see that like in all Equity mutual funds, if one can remain invested in an ELSS for 8-10 years, he can make a decent amount of return which would beat the returns from most of the other Tax Saving instruments
Financial advisors and planners say that for a disciplined approach to Tax Saving, a monthly SIP in an ELSS could turn out to be one of the best Tax Saving option for a salaried investor.
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