ant to invest in the equity market and avail of a tax break simultaneously?
Well, at times, you can can have your cake and eat it too!
The trick is to do it via an ELSS.
What is that?
Equity Linked Saving Schemes are mutual funds with a tax benefit.
In fact, they are a mirror image of diversified equity funds.
That means the fund manager invests 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.
Let's say this was your situation in the last financial year (April 2004 - March 2005):
You have to pay tax = Rs 18,000
Your rebate = 20%
You invested 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 - 2000).
This has changed. And you can now invest more than Rs 10,000. You pick your limit (upto Rs 100,000).
There is a catch, though. To avail of the tax benefit, you must block your money for three years. In a normal diversified equity fund, you can withdraw the money whenever you want. Here, you keep it locked.
How have they performed?
In the three years ended April 12, 2005, tax planning funds generated an average annualised return of 40.13%.
1. Magnum Taxgain ended 2004 on a high. The fund zoomed 53.75% to become the hottest fund of the year.
Its performance in the tough first half of last year was remarkable. The fund lost 6.67% in the first quarter and managed to repeat the performance in the next quarter when its peers were down an average 9%.
2. HDFC Taxsaver gave a return of 49.22%
3. HDFC Long Term Advantage Fund: 46.32%
4. Sundaram Taxsaver: 43.64%
5. Libra Taxshield '96: 39.63%
These were the five ELSS gainers of 2004.
Of the 20 tax-planning funds, only LICMF Taxplan (11.18%) and Franklin India Index Tax (10.74%) failed to beat the 13.08% return of benchmark Sensex.
The best way to invest?
Via an SIP.
A Systematic Investment Plan is a vehicle offered by mutual funds to help you save regularly.
It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund.
The minimum amount to be invested can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly.
An SIP allows you to take part in the stock market without trying to second guess its movements.
It makes you disciplined in your savings. Every month, you are forced to keep aside a fixed amount. This could either be debited directly from your account or you could give the mutual fund post-dated cheques.
If you put in Rs 1,000 this month, it will be blocked for three years from this month.
Next month, you put in Rs 1,000. And it will be blocked for three years from that month. So it is blocked from three years from the date you make the investment.
How you gain by an SIP in an ELSS?
1. You can invest in shares and leave the stock selection to professional fund managers.
2. You get a tax rebate on your investment.
3. Dividends are tax free.
4. An SIP lock-in period (3 years), compared to lock-in periods of other tax-saving avenues like PPF (15 years) and NSC (6 years), is much less.
5. Since your money is blocked for three years, you will not pay any capital gains tax.
6. You get disciplined in your savings since you have to put aside a portion every month.
Final word
Tax planning equity funds have proved their worth. They save taxes and make you smile with handsome returns.
Though it cannot be emphasised enough that they are more volatile and risky compared to other tax saving options.
So if you are prepared to take a risk, go for it.
Data supplied by Value Research
Illustration: Dominic Xavier
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