As the close of financial Year 2009-10 nears by, the inflows into Equity-Linked Savings Scheme (ELSS) is gaining its ground over other mutual fund schemes for the sheer benefit of tax-saving advantage that these schemes offer to its investors. In fact, since last one month, the record inflow of retail funds in to such ELSS schemes is gradually over-powering the inflows in some of the more well-known diversified equity schemes of various fund houses.
Under the prevailing set of law, investors can invest up to Rs.1 lakh in ELSS schemes to avail of tax exemptions under Section 80C. However, an investment under this special tax benefit scheme comes with the rider of minimum lock-in period of three years for its investors.
Undergoing Proper Due-diligence
A prudent investment practice would involve investing in any asset class with a proper planning and reasonable due-diligence. Like, for example, an investor in real-estate property would check out certain aspects like price per square feet, location of the premises, amenities provided in the premises, etc. before investing his money.
Similarly, an investor in a direct equity market would check out on certain company fundamentals, valuations, management quality, etc before investing the same hard earned money. So, how is arbitrary investment in tax-saving ELSS schemes without any proper due-diligence justified simply because the financial year is approaching its last month?
At the end of the day, even the ELSS schemes are going to invest a major part of its inflows in to equity. What if the stock market valuations are expensive at the time of arbitrary investment made during the year end horizon?
Take, for example, those investors who arbitrarily invested during January and February of 2008 at which time the benchmark index Sensex was hovering around 19-20k. Eventually, stock markets went in to a major bear market for next 2 years since then. The then investors who invested arbitrarily at the market peaks for the sole purpose of tax-saving benefit are still bleeding to date even as we witness doubling of stock markets from their lows of recent slow down. Reason being Sensex is still way below 19-20k and those levels of high NAV is still awaited.
Staggered Approach to Investment
So this indicates the significance of thumb rule regarding proper due-diligence and analysis being applicable to all types of asset-class including ELSS tax-saving schemes. A better approach would be to make use of ELSS schemes, just as SIP works for Diversified Mutual fund schemes, in form of staggered approach to investing during the course of whole year rather than arbitrary investment in lump sump amount at the end of the financial year.
The arbitrary investment would mean betting your entire amount of investment with respect to market levels on that particular date rather than continuous process of investing in staggered manner and taking benefit of all the market ups and downs. This could prove fatal when markets are at the higher price curve; eventually it may lead to lower or no yields at all, at the end of the 3 year lock-in period. This nullifies the investment objective which gets sacrificed for the sole purpose of tax-saving benefit through ELSS schemes.
ELSS vs. Diversified MF
Investors might argue, in that case, the investment perspective is more elegantly met by investing directly in diversified equity schemes itself, if SIP is the approach that is recommended for better yields and returns. I would say, ELSS schemes come with an added advantage of 3 year lock-in period which gives the fund manager an extra elbow room of 3 year investment perspective, unlike diversified funds, where stability with respect to fund outflow is more controlled and capped during times of down turn. From this perspective, ELSS schemes are no less lucrative an offer vis-Ã -vis other equity schemes when used in a staggered approach of investing regularly. Having said that, once all this is factored in, the final yields does cling on various other aspects too like fund house policy, fund manager quality, past performance, etc.
Were you about to invest your lump sump amount in ELSS scheme in next few days? Don’t you agree to debate of a planned approach to investing for your hard earned money?
Arun’s Note: We are nearing the Financial Year end, and most of us are working on how to save taxes. Hence, over next few days we will be featuring series of posts on personal Finance and Investments that may help readers to make informed decisions on their Taxes and Finance. Request to readers – If you have any specific questions, do not hesitate to drop us a line. We will do our best to try and help you out !