Pardon me but I forget the name of the reader who brought up this important question of whether he should invest in ELSS (Equity Linked Saving Schemes) given the Direct Tax Code that will possibly see the light of the day in April 2012.
Direct Tax Code and ELSS have been discussed very heavily in the media given the impact DTC will have on ELSS. Let me add to the misery of everyone by touching upon the nuances again.
Direct Tax Code and ELSS
ELSS are tax saving mutual funds where in your contributions are eligible for exemption under Section 80C up-to a limit of the entire 1 lakh.
They are similar to equity diversified mutual funds. Like equity diversified mutual funds, they have both growth and dividend options available.
One thing that differentiates them from other equity oriented mutual funds is that they have a lock in period of 3 years. So every systematic investment planning (SIP) that you do in ELSS, gets locked in for 3 years.
Now, from the current basket of Section 80C investments, ELSS and other equity oriented investments (read ULIP) are the only ones that have the potential of giving inflation adjusted returns. The rest like Public Provident Fund, 5 year FDs, NSC can hardly beat inflation. So investors are better off putting their money in ELSS for long term investing if they are yet to consume their Section 80C investment of Rs 1 lakh.
That is about to change – the Direct Tax Code says ELSS will not be considered as an investment qualifying for Section 80C benefits anymore. So essentially it will lose its Exempt-Exempt-Exempt (EEE) status from April 2012.
But wait, don’t throw up yet.
Firstly, no one is yet sure whether the Direct Tax Code will see the light of the day – this year or next.
Secondly, lobbying to ensure that ELSS does not meet its expected fate is on. The mutual fund industry is already reeling with folio exits by investors at the back of regulatory norms that went against mutual fund investments. Now this ruling will only make matters worse for an already struggling industry. So for all you know, the government might continue as is.
Thirdly, all the investments that you do now, lump sum or SIP, will still qualify for tax deductions till DTC is implemented. So why bother ?
For this year, there is nothing which should ideally stop you to invest in ELSS – DTC or no DTC !
Returns of ELSS funds
Since ELSS funds are locked in for 3 years, the fund manager gets the best out of this time frame to invest the money and generate the returns. So it makes sense to look at the 3 years returns of ELSS funds.
Here they are :
Looks good, isn’t it ? But if you argue that the returns since launch is a more important parameter to look at than the last 3 years returns, you might be right.
So let’s quickly look at the returns of the ELSS mutual funds since launch.
If the lowest return is taken, that is 22%, which is a great feat. This is as good as any diversified equity mutual fund would return.
So while this is a heated topic in the corridors of personal finance and there are arguments flying thick and fast, invest if you are wanting to do so from a tax saving perspective. An icing on the cake could be the dividends which some of them have delivered – approximately between 1 to 3 Rs per unit.
Don’t worry about the imminent looming divorce between DTC and ELSS, enjoy the honeymoon while it lasts !