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Showing posts with label Mutual Fund ELSS. Show all posts
Showing posts with label Mutual Fund ELSS. Show all posts

Sunday, September 12, 2010

Understanding ELSS Mutual Fund

What are ELSS?

ELSS (Equity Linked Saving Schemes) are the mirror image of diversified equity funds.

That means the fund manager will invest in shares of various companies across various industries. Hence, it is a normal equity diversified fund. Then, there is the added tax benefit which a normal diversified equity fund will not have. This sets it apart.

Currently, if you invest in such funds, you get a rebate. Let's do it with figures.

You have to pay tax = Rs 18,000

Your rebate = 20%

You invest Rs 10,000 in ELSS.

Your savings = Rs 2,000 of your tax (20% of Rs 10,000).

So instead of paying tax of Rs 18,000, you pay a tax of Rs 16,000 (18,000 - 2,000).

This has changed and you can invest much more than Rs 10,000.

Why ELSS?

The returns are good like that of diversified mutual funds. These funds have a lock-in period of three years. This is not bad at all. It prevents you from unnecessary withdrawals and spending and helps earn a return over time.

Moreover, the three year lock-in period is needed. Because when you invest in equity, you must take a long-term view. The real potential of equities starts to show only after a few years. This allows you to ignore the short-term slumps and stay invested for the long haul.

Also, the lock in gives fund managers the freedom to take sector and stock bets, which they are not able to do in the regular equity schemes.

The dividends you earn will be tax free.

When you sell the units of these funds, you can avail of the long-term capital gain for which there is no tax. If you sell after one year, you pay no tax.

The good picks

Five ELSS worth considering are:

i. SBI Magnum Tax Gain

ii. Franklin India Taxshield

iii. HDFC Tax Saver

iv. Prudential ICICI Tax Plan

v. Sundaram Taxsaver

Since fund managers invest most of their money in equities and equity related instruments, there is some amount of risk involved. But it is always wise to have some amount of equity in your portfolio. And if you are not too sure about directly getting into the stock market, a mutual fund is your best bet.

ELSS Funds Shine during the Week

Equity link saving schemes (ELSS) category of mutual funds emerged as the biggest gainers during the week ended Sep. 9, 2010 followed by equity-diversified funds and index funds.

ELSS Funds

NAVs of the ELSS funds category gained 3.04% in the week ended Sep.09, 2010.

Among the ELSS funds, Reliance Tax Saver (ELSS) Fund gained 4.33%, Reliance Equity Linked Saving Fund - Series 1 added 3.77%, Escorts Tax Plan rose 3.72%, DWS Tax Saving Fund climbed 3.50% and DSP BlackRock Tax Saver Fund gained 3.45%.

Equity-Diversified Funds

NAVs of the Equity-Diversified funds category gained 2.94% in the week ended Sep.09, 2010.

Among the Equity-Diversified funds, HSBC Small Cap Fund gained 7.32%, HSBC Midcap Equity Fund added 6.26%, DSP BlackRock Micro Cap Fund - Regular rose 5.65%, Sahara R.E.A.L. Fund climbed 5.63% and Birla Sun Life India Reforms Fund gained 5.47%.

Index Funds

NAVs of the Index funds category gained 2.86% in the week ended Sep.09, 2010.

Among the Index funds, HDFC Index Sensex Plus Plan gained 3.14%, HDFC Index Sensex Plan added 3.13%, LICMF Index Fund - Sensex Plan rose 3.13%, UTI Master Index Fund climbed 3.12% and Taurus Nifty Index Fund gained 3.12%.

Balanced Funds

NAVs of the Balanced funds category gained 1.96% in the week ended Sep.09, 2010.

Among the Balanced funds, ICICI Prudential Child Care Gift Plan gained 3.23%, Principal Child Benefits Fund-Career Builder added 3.12%, LICMF Systematic Asset Allocation Fund rose 3.01%, UTI Balanced Fund climbed 2.80% and Tata Smart Investment Plan - 1 - Scheme A gained 2.72%.

Debt Funds

NAVs of the Debt funds category gained 0.12% in the week ended Sep.09, 2010.

Among the Debt funds, ICICI Prudential S M A R T Fund - Series G - Retail gained 3.87%, Birla Sun Life Equity Linked FMP - Series A - Retail added 3.73%, UTI CCP Advantage Fund rose 3.07%, Sundaram BNP Paribas Global Advantage Fund climbed 2.86% and DWS Fixed Term Fund - Series 50 - Plan A gained 2.86%.

Sector Funds

All the sector fund categories gained during the week ended Sep.09, 2010. Among major gainers in the sector fund categories, were Bank (4.37%), Media and Entertainment (4.12%), TMT (3.9%), PSU (3.2%), Financial Services (3.13%), Auto (2.98%).

Tuesday, June 15, 2010

Mutual Fund ELSS - Best Tax Saving Instrument

Equity Linked Savings Scheme (ELSS) is a mutual fund savings scheme that predominantly invests in equity and offers tax deduction to investors under section 80C of Income Tax Act. It has a lock-in period of 3 years.

What is section 80C?

As per Income Tax act 80c investment up to Rs 1,00,000 in tax saving instruments like PPF, NSC, ELSS etc. are eligible for deduction from the gross total income hence reducing the total taxable income.

For example, Mr. Suresh (Resident individual with age less than 65 years) has annual income of Rs 10,00,000 and he invest Rs 1,00,000 in ELSS then his taxable income is reduced to Rs 9,00,000. As per the current tax laws, his saving will be Rs. 30000 if he takes benefit of section 80C provision.

Benefits of ELSS over other Tax Saving Instruments

High Risk- High Return: ELSS being a equity-linked scheme has the potential to earn higher returns as compared to other tax-saving instruments that give returns of a fixed nature. A longer investment horizon reduces the risk in equity investment considerably. Lock-in-period of 3 years in ELSS ensures that investor has a longer investment horizon. Moreover, an investor has the option to stay invested for more than 3 years.

Liquidity: On liquidity parameter, ELSS is the best option. The lock-in period of 3 years is the shortest as compared to other tax saving instruments. The maturity period of NSC is 6 years and of PPF is 15 years. An investor looking for intermittent cash flow can also opt for dividend payout option in ELSS.

According to current tax laws, dividend and long-term capital gains from ELSS schemes are tax-free in the hands of the investor under section 10(35) and section 10(38) respectively. Barring PPF, interest on all other tax saving instrument is taxable.

Investors can also go in for Systematic Investment Plan (SIP) in ELSS and benefit from the concept of rupee cost averaging and power of compounding.

Suitability: ELSS is suitable for all types of investors who have moderate to high risk appetite and need to invest in tax planning schemes/instruments.

Note: ELSS as tax saving instrument may not be the best option for an investor at the age of 55, if stock market is in bearish phase during that period, returns on investment from ELSS after 3 years may not exist and there could be loss, hence it is always good to invest through SIP (systematic Investment Plan).

ELSS is the best tax saving instrument for investors in the age group of 25 - 45, as they can hold it for a longer period to get good returns as compared to other tax saving instruments under 80C and keep on investing on regular basis to get benefitted from Rupee Cost averaging in a long run.