FUND FLAVOUR

November 2010

The versatile ELSS Funds…

ELSS Funds are variants of diversified equity funds. Besides being equipped with the typical features of diversified equity funds, they offer tax advantage. You can make your investment tax deductible under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1 lakh. The ELSS funds have a lock-in period of three years. They are the gateway through which novices to investments get a taste of equity. ELSS Funds are one of the best tax saving options and an excellent mode of investment.

Saving taxes and building wealth too…

Why is ELSS the best investment strategy for tax savings?

• Generates highest returns as compared to other investing avenues.
• Provides a lock-in period of three years which is the minimum for any tax saving avenue.
• Lock-in enables long term investing in equity markets.
• Promotes disciplined investing by enabling SIP of Rs 500 per month.
• Dividend option enables liquidity since you get tax-free dividends during the tenure.
• Provides dual benefit of capitalising on superior returns as well as tax saving.

Advantage “ELSS”

The added and unique advantages of ELSS Funds have been enumerated below:

Cost conscious

According to the data from mutual fund rating agency, Value Research, 14 ELSS schemes had an expense ratio of 2.5% and 19 others had a lower expense ratio. Of the top 10 ELSS schemes seven had a ratio lower than 2.5%, while the remaining three had a ratio of 2.5%. This kind of lower cost is good for a long-term investor who stays invested in the scheme for several years.

Old is gold

The last ELSS scheme was launched in October 2005 and the first scheme came to the market in March 1993. So, the youngest ELSS fund is five years old.

Low Performance Differential

In the last one year, the best performing ELSS scheme returned 127% and the worst performer returned 63%. In comparison, the difference between the worst and best performing equity diversified funds was a whopping 138%. When compared over a period of two or three years, returns given by the best and the worst performing ELSS were 24% and 22% per annum, respectively.

Match making

There are more than 30 ELSS schemes available in the market today. Choice of ELSS funds depends upon your risk profile and priorities. You should make an investment decision based on overall financial planning.

Large Cap ELSS Funds: These funds invest predominantly in the large cap companies. While this may mean muted returns when the markets are rising, it may also mean a limited downside when the going gets tough. Franklin India Tax Shield and SBI Magnum Tax Gain are a few examples of this type of fund.

Growth ELSS Funds: These funds have about 30% exposure to mid-caps, 10% to small-caps & the rest in large caps in their portfolio. Hence, they may give a higher return in rising markets. Sundaram BNP Paribas Tax Saver is a good option in this category.

Mid-cap ELSS Funds: No pain, no gain. These funds have a sizeable exposure to mid-caps and small-caps. This aggressive investment style can pay rich rewards. Sahara Tax Gain and HDFC Tax Saver are good examples of such funds.

Small Cap Funds: Small-cap stocks can act like performance enhancing drugs. In the above discussed types, the maximum allocation to small-caps is 12%. However, Taurus Tax Shield has invested almost 30% in this high-risk zone. This can be very rewarding when the going is good, but a dream run can easily become a nightmare. Taurus Tax Shield has given 98.01% returns in last one year.

ELSS is a great instrument for tax planning which also ensures good returns. But investment should be carefully planned and you should devote sufficient time in selecting the right fund. GEM GAZE that blossoms next week will aid you in the process.

Risky route

The basic risk with ELSS funds is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital. If you choose an ELSS fund which has delivered excellent performance in the past years and has a track record of consistent performance, and invest regularly for the long term, the chance of you losing out would be negligible.

…to go the dinosaur way?

All said and done, there is a greater risk looming large…the possible extinction of this venerable instrument, thanks to the DTC, which comes into effect from April 1, 2012. ELSS Funds will no longer get tax exemption under DTC. It is this tax exemption that sets it apart from equity diversified funds and gives it the added advantage. ELSS Funds, at present, is an endangered species. Hopefully, the laws are altered before such an unfortunate calamity befalls.