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.
Download Free Book on ELSS – Details & Comparison
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. This is due to 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. This will be till DTC is implemented. So why bother ?
For this year, there is nothing which should ideally stop you to invest in ELSS. – DTC (Direct Tax Code) or no DTC !
Returns of ELSS funds
ELSS funds are locked in for 3 years. The fund manager gets the best out of this time frame to invest the money. This helps to generate better returns. So it makes sense to look at the 3 years returns of ELSS funds.
Here they are :
ELSS 3 year returns
Looks good, isn’t it ? But if you argue that the returns since launch is a more important parameter to look. Then the last 3 years returns, you might be right.
So let’s quickly look at the returns of the ELSS mutual funds since launch.
ELSS returns 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. There are arguments flying thick and fast. You should invest if you are wanting to do so from a tax saving perspective. An icing on the cake could be the dividends. 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 !
I have one question regarding returns since launch.In the table provided launch dates of various funds have not been mentioned.So it is not clear whether all the funds were launched on the same date or different dates.If the funds were launched on different dates then no meaningful purpose is served by comparing returns since launch as this comparison then becomes highly misleading and no conclusion regarding the relative performance of the funds can be drawn.
@ANIL KUMAR KAPILA, While the launch date of funds might be important for a better comparison, the inception table still tells an investor how company has performed since its launch. It clarifies the high last 3 years returns are a one-off thing or company has been performing consistently since inception. It can still help in deciding which MF to go for. Won’t you agree?
@Vivek K,
I am not against the inception table as such.What I am trying to say is that if the launch date of the fund is also included in the table then this table will become more useful.For example if one fund is launched five years back and another is launched ten years back then if the launch date is available the investor will know that he is not comparing apples with apples but apples with oranges.
@ANIL KUMAR KAPILA, Agree that the table will be MORE useful if launch date is also included.
@Vivek K,
I tend to agree with Anil here. That extar bit of information will help in assessing for how long a fund has performed well.
A fund which has been in existence for a longer duration and performed well will get more marks than one which has existed say for 2 years and performed well.
The former fund has seen more ups and downs in the market than the latter.
Let me see when I can do this. Thanks for bringing this to my notice.
@Radhey,
That is exactly my point.You have hit the nail on the head.
None of you asked one critical bit of information –
what will happen to the ELSS funds when they tax sops stop. So obviously they will lose their sheen and so MF houses canot afford to contniue with them.
What do you guys think will happen to these funds ?
@Radhey, I am not investing in ELSS so not really bothered what will happen to them. However, I feel they will be discontinued due to lack of demand. I don’t see any reason why investor would want his/her money to be blocked for 3 years without any added benefit.
@Vivek K,
I am also not invested in ELSS funds so like you not bothered.However, my feeling is that lock in period of three years is a blessing in disguise for the investors.Except for tax benefits these funds are just like any other diversified equity mutual funds.In any case we invest in diversified equity mutual funds when our time horizon is more than five years.So this lock in period will not matter to me if I invest in these funds.
@Radhey,
It is a hypothetical question at this stage so I have not given it a serious thought.Most probably these funds will exist independently with a different name or get merged in some other fund.
If we see the history of UTI Mutual Fund House which is the oldest fund house we will find that most of its funds which were originally launched as close ended tax saving funds were subsequently made open ended and merged in some other funds.ELSS Funds can also meet a similar fate.
@ANIL KUMAR KAPILA, Yes that is what I was wanting to get to.
Either they will be made open ended or they will be merged with existing funds.
Good one guys, keep up the good work.
Radhey,
Thanks for article, good analysis. 20% returns is not bad at all, it beats all other avenues of investments. I will me more than happy if DTC is postponed.
@Rakesh, Do you invest in ELSS Rakesh ?
@Radhey,
Yes i do invest in ELSS but since last few years the percentage of investment in ELSS has fallen as EPF, PPF & LIC completes the 80C requirements.
I personally feel that DTC should retain ELSS schemes under 80C. I have been investing in major part of tax plannings in ELSS through SIPS and occasionaly in lumpsum since 5 years and pretty happy with the performance so far. If DTC eliminates ELSS, I would have to shift to PPF, no other better choice otherwise 🙁
@Sandeep Sudhakaran, Yes Sandeep, under DTC, only NPS and PPF might end up with tax breaks under Section 80C.
I hear that on March 2th, Yashwant Sinha is going to take a call on the scope of DTC, so let’s keep our fingers crossed !
@Radhey,
March 2nd that’s tomorrow, big day for tax savy investors who invest in ELSS. I will watch the news closely. Is it going to be declared by Yashwant Sinha or the FM. What portfolio does he hold, i though he was from BJP.
@Rakesh, The budget will be delivered by the FM but the DTC was being led by Yashwant Sinha.
@Radhey,
Ok, got it. So DTC is the brain-child of Mr. Sinha, good.
@Radhey,
Any update on the same, i tried to Google but no luck.
@Rakesh, Not yet Rakesh, just need to wait I guess ! When is the budget ?
@Radhey Sharma, Budget is on 16th March I heard. I am very keen to know about the future of DTC now. The tax free slabs are most likely to be increased to 3 lacs, that’s all I can see floating on the budget news.
@Vivek K, And Sec 80C to be increased from 1 lakh to 2.5 as well !
@Radhey Sharma, The 80C amendment is only if DTC is implemented but the tax slabs will change irrespective of DTC’s fate. Correct me if my understanding is wrong?
@Vivek K, No tax slabs are changing as part of DTC rollout.
@Radhey Sharma, I think the tax slabs will change even if the DTS is (late) not in, though not so sure.
Increasing the limit to 2.5 lacs will bring relief to lot of middle-class investors. It will save tax too.
@Rakesh, There is a catch to it, only PPF and NPS will fall under 80C then. So, public doesn’t have much option and government is going to get that money for their investment purpose.
@Vivek K, I don;t mind the catch actually. IT is forcing us to invest more money in debt for retirement. It’s not bad but for people who earn less, it will leave less in the pot to out in equity.
@Radhey Sharma, Yea but the only sad part is no exemption for home loan interest 🙁
@Vivek,
No exemption for home loan interest will hurt a lot of people. With home loans becoming easier many people have taken it and if they don’t get an exemption they would end up paying more tax.
@Rakesh, Exactly! How else do you exactly encourage people for taking home loans? This is the time our country needs more home owners and this move is going to discourage that big time. And who knows people may start dealing more in black money when they see no benefit in taking home loans.
I think this policy should be revisited or might get rolled back after a year or two of implementation or India is trying to learn from west and discourage unnecessary borrowing? We will have to wait and watch.
Now each one of us will have to open NPS in addition to PPF, Earlier it was compulsory for Govt. employee. The latest count of people opening NPS account was just 5 million.
Still no mention about DTC only “Direct Tax Code (DTC) Bill to be enacted at the earliest” or did i miss anything?
@Rakesh, Yea this is the only thing I could pick up as well. Looks like it will be postponed by another year .. Sigh!
@Vivek,
Yes, we have one more year to invest in ELSS.