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Save your taxes with ELSS mutual funds
February 11, 2010

ELSS mutual funds is a special category mutual funds specially designed for tax saving purposes


Author : Manjunath Gaddi



Untitled Document

Every year, mostly in the months from January to March people put money up to Rs. 1 lakh into tax savings schemes like Public Provident Fund, life Insurance schemes, ULIP schemes, 5-year Fixed Deposits, ELSS mutual funds and various other schemes to save taxes up to Rs. 30,000 under Section 80C of the Income Tax Act.

We look at ELSS funds. ELSS stands for Equity Linked Savings Schemes. It is a special category of mutual funds created specifically for tax saving. The difference from other mutual funds is that this is an equity-oriented mutual fund with a lock-in of minimum 3 years. That is, to be eligible for tax deduction, the investor is required to be invested into an ELSS fund for at least a period of 3 years. You do not have an option of redeeming from an ELSS fund before the completion of 3 years.

The ELSS funds invest mostly into shares of companies listed in Indian stock exchanges. In that sense, investing into ELSS mutual fund schemes is a double bonanza. One can say that it is not a bad bargain wherein you save tax up to Rs. 30,000 as well as earn returns from the equity markets. Also, the lock in period is the lowest of any investment approved under Section 80C of the Income Tax Act.

 Although ELSS funds were available from 1996, it is only in the past few years that the ELSS funds have become very popular with tax savers and investors alike. From chart 1, we can see the growth of the assets of the ELSS funds over the past few years. Prior to 2005, the assets in ELSS funds were around Rs. 500 crores but by January 2010, the assets in ELSS schemes have grown close to Rs. 22,500 crores, a jump of close to 4400%, in just a matter of 4 years.

 

chart 1: Growth in assets under ELSS mutual funds

 


Part of this spectacular growth is due to the stock market performance from 2004 to 2007; although the assets in the ELSS funds reduced in 2008, but the market crash of 2008 did not deter the investors from investing into the ELSS funds. Once the market recovered in 2009, by the January 2010, the assets of ELSS funds have reached close to Rs. 22,500 crores. This is much higher than Rs. 16,000+ crores of assets reached in December 2007, when the Indian stock markets were at an all time high. 

Performance of ELSS Funds

Given its value to the investors, the ELSS fund is a very important category and every asset management company makes sure that they have at least one ELSS fund. Currently there are 37 ELSS funds and 17 of these funds have been in existence for over 5 years. Table 1 show us the top 5 performing funds for the past 5 years on our platform

Table 1: The Top 5 performing funds for the past 5 years

Scheme Name

6 Months

1 Year

2 Years

3 Years

5 Years

Since Inception

SBI MAGNUM TAX GAIN FUND- GROWTH

13.6%

77.1%

-1.1%

5.2%

26.1%

18.2%

HDFC TAX SAVER - GROWTH

22.7%

99.5%

8.7%

8.8%

23.6%

32.2%

SUNDARAM BNP PARIBAS TAXSAVER OPEN ENDED- GROWTH

8.2%

66.7%

3.4%

10.9%

23.3%

22.2%

ICICI PRUDENTIAL TAX PLAN - GROWTH

26.9%

115.7%

9.2%

8.6%

20.4%

26.6%

FT INDIA TAXSHIELD- GROWTH

16.2%

76.0%

4.7%

9.1%

20.0%

30.0%

Source: iFAST Compilations, NAV as at 10th February 2010. Performance below 1 year is in absolute terms and Performance above 1 year is annualised


As of end of December 2009, the expense ratio of most ELSS funds is in between 1.82% to 2.5%. 

In the current market climate, as seen from chart 2, we find that the fund managers of the ELSS funds have become aggressive with their equity investments as compared to January 2008. The average cash holdings and debt investments across ELSS funds have dropped from 13.8% in January 2009 to 5.2% in January 2010. Also, the exposure to the midcap sector, as measured by the exposure of the ELSS funds to companies in the BSE Midcap index, has increased from 17.3% in January 2009 to 25.2% in January 2010. The exposure to large caps as measured by the exposure of the ELSS funds to companies in the BSE SENSEX has reduced from 42.2% in January 2009 to 38.7% in January 2010.

Investing in ELSS Funds

Most long term investor would prefer to choose investing into the growth option of an ELSS Fund and for investors who like dividends, there are dividend payout and dividend reinvestment schemes in ELSS funds wherein the dividends are tax free in your hands. However, please note that if you choose a dividend reinvestment ELSS scheme, even the units allotted from the reinvestment are locked in for three years.

Conclusion

To sum it up, ELSS funds are a special category of mutual funds that help you save taxes up to Rs. 30,000 on investing up to Rs. 1 lakh, under the Section 80c of the Income Tax Act. Additionally, ELSS funds have one of the lowest lock in period for any investment approved under Section 80C of the Income Tax Act. Investors into ELSS schemes enjoy double benefits of paying lower taxes and enjoying equity market returns.

To view and buy the various ELSS funds on our platflorm click here and choose fund class as "ELSS" and then click generate table

Chart 2: Exposure of ELSS funds to various market cap


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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