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Kultur Dokumente
ELSS
CONTENTS
Introduction........................................................................................2
Benets of equity investing ..............................................................4
What is ELSS and how it helps ........................................................6
Invest with small amounts .................................................................8
The cost benet of ELSS .................................................................9
Options and lock-ins ....................................................................... 11
How to choose ELSS ...................................................................... 14
How many ELSS to choose............................................................16
How long to remain invested ......................................................... 17
Tax benets of ELSS .......................................................................18
How to start with ELSS investments .............................................18
Role of ELSS ....................................................................................19
Using ELSS for life goals ............................................................... 20
Common ELSS myths ....................................................................23
Project Editor Kundan Kishore
Copy Editor Sutirtha Sanyal
Art Director Manojit Datta
Design Saji C.S.
Cover Design Manojit Datta
Copyright Outlook Publishing (India) Private Limited, New Delhi.
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Editor: Udayan Ray. Published from Outlook Money, AB 5, 3rd Floor, Safdarjung Enclave, New Delhi-29
Outlook Money does not accept responsibility for any investment decision taken by readers
on the basis of information provided herein. The objective is to keep readers better
informed and help them decide for themselves.
February 2013
[ 1]
GROWTH PLUS TA
ELSS
Sail the equity market with the benefit of tax saving
and forced lock-in to meet your long-term goals
[ 2]
AX SAVINGS WITH
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the power of compounding because the earlier you start investing, the more time your money gets to grow. If you start
saving early, even in small amounts, it will help you build a
sizeable savings portfolio. The rule is to invest regularly and
keep reinvesting the returns so that your earnings also help
in fetching more returns.
A first-time investor in equities should ideally start with
equity mutual funds (MFs). Jumping into the stockmarkets
with little or no knowhow may not be the right thing to do.
An early start to investing with equity MFs also inculcates a
disciplined habit of investing. Stockmarkets remain volatile
in the short-to-medium term but average out over the longer horizon. An investor having seen the ups and down of
such market remains poised for the long haul and is largely
undisturbed with such frequent fluctuations. And most importantly, mistakes made during the initial days of investing
helps one learn the basics of investment that come to ones
aid in the later stages of life. That said, one can even take to
equity investing with ELSS. They offer market-linked return
and have a shorter lock-in period and also offer a cost-effective way for the small investor to access equity markets.
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through the system investment plan (SIP) route. But, considering the volatility in the stockmarkets, it is better to invest in
ELSS through the SIP route. You get to make your investments
in the equity markets with a smaller amount and because the
investment is in an ELSS, you also save taxes. As such one
cannot define the right time to invest in equity MF scheme or
ELSS through SIP. There is no maximum investment cap, but
the tax advantage in ELSS is only up to `1 lakh. ELSS is part of
the Section 80C instruments which are cumulatively eligible
for a deduction from income up to `1 lakh.
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a lock-in period. Thus, if you were to choose the dividend reinvestment option, there will be incremental lock-in of three
years on the dividend reinvested and no tax deduction can be
claimed on such re-invested dividend.
At present, all ELSS available are open-ended and so, provide
the flexibility to invest or withdraw (subject to the completion
of lock-in period) at any time during the year, without being
restricted to any specified time period. In effect, this helps the
investor manage his/her cash flow better. The funds that become open-ended three years into their purchase by an investor allow the investor to continue with his or her investment
and redeem it as per the market condition. However, in the
event of death of the unitholder, the legal heir, subject to production of the requisite documentary evidence, will be able to
redeem the investment only after the completion of one year
or any time thereafter, from the date of allotment of units to
the deceased unit holder.
Lock-in. Investments in an ELSS have a lock-in period of
three years and there is no option to exit early. The lock-in
prevents early withdrawal of your investment and helps your
money grow over a period of time. Experts have always advocated a long-term view for investment in equities. The lock-in
sees to it that you ignore short-term market fluctuations and
remain focused on creating wealth in the longer-term. Besides, when compared to other tax-saving instruments, such
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as the National Savings Certificate (NSC) and Public Provident Fund (PPF), which have lock-ins of six and 15 years, respectively, a three-year exit restriction is on the shorter side.
The lock-in also lends an element of stability to ELSS portfolios. Since corporate money is kept out, these schemes dont
have to deal with sudden, large-scale redemptions. As a result, ELSS tends to have a more stable corpus and an optimum
corpus size, which encourages better fund management.
Due to this lock-in-period, the Asset under Management
(AUM) remains more stable and the cash flow is more predictable and also leaves fund managers with less burden of managing redemption. This provides the fund manager with greater
freedom to perform. The fund manager can take a medium- tolong-term view on certain stocks; this helps in improving the
returns from the schemes. The lock-in-period of three years in
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
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the longer time a fund has to test its mettle in various market situations. That would also make it easier for the investor to evaluate consistency in a funds performance. The
performance of the fund should be compared with that of its
benchmark and peers. An investor should also assess the risk
and return strategy of the fund and take a call on whether
he is comfortable with it. Fund houses with strong and established processes and the ones that focus on fund management
teams rather than star fund managers are better.
The focus of the funds portfolio to different segments of the
market, such as large-, mid- and small-cap, gives an indication of the volatility that an investor can expect in a fund.
However, majority of the ELSS are inclined towards large-cap
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
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stocks as far as portfolio building is concerned. Also the threeyear lock-in reduces the risk in equity investing to a great extent and allows the fund manager to choose stocks with longterm potential without liquidity concerns. One should also
look at the type of fund management style ELSS funds carry
and whether they invest in value or growth stocks. The biggest advantage of an ELSS is that it allows investors to choose
products according to their risk appetite. The suitability of a
fund depends upon the compatibility of the funds strategy
with the risk appetite of the investor.
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tion under Section 80C of the Income Tax Act, 1961. During this stage of your life, since you are likely to be without
major responsibilities or liabilities, you can take risks with
your investment such as those involved in equity MFs. This is
why many financial experts recommend investing in ELSS of
MFs. With ELSS, you can invest even amounts as less as `500
every month in equity MFs through SIPs.
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investors. However, this does not hold true. Buying last years
top performer is the only criteria that many investors use to
select a scheme for inclusion into their portfolio. The conditions that made a fund an outperformer during a particular
period may not exist in the subsequent years. A funds performance should be tested for consistency across time periods
and then selected if it matches the investors need profile.
So while investing in ELSS, you should look at long-term
performance track record of the scheme, say 3-5 years rather
than their short-term performance or lower NAV. Also, if you
are looking for dividend options, a dividend declaration any
time soon should not be the only criteria. There could be a
possibility that a good performing fund might not be declaring dividend soon at the time of your investment. However, in
the future, it may declare dividend and also reward you handsomely in the long-run in terms of its performance.
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY
HDFC MUTUAL FUND