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Tax-saving funds – Now is the time - Views on News from Equitymaster
 
 
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  • Jun 7, 2001

    Tax-saving funds – Now is the time

    Most investors leave their tax-related investments (like PPF, NSC, infrastructure bonds) for the eleventh hour. While that may be okay for fixed income instruments, there is sound investment rationale for staggering investments in equity linked savings schemes (ELSS).

    Investors who have been looking at ELSS as a mere tax-saving instrument and bunch up their ELSS investments in February/March are missing the rationale behind rupee-cost averaging or the systematic investment plan (SIP). Unlike say PPF, NSC and infrastructure bonds, which have a fixed income element and the cost of investment follows predictable lines the case with ELSS is exactly the opposite.

    OPEN-ENDED, ELSS SCHEMES SIP
    (Rs)
    NAV
    (Rs)
    1-MONTH 12-MONTHS INCEPTION
    UTI EQUITY TAX SAVINGS 500 9.2 1.5% -12.9% -12.0%
    PRU ICICI TAX G 500 10.7 2.5% -20.3% -4.2%
    KP TAX G 500 22.5 -1.9% -21.9% 47.8%
    SUNDARAM TAX - 8.0 -0.5% -21.9% -13.7%
    DUNDEE TAX APP 500 7.4 0.1% -26.7% -22.0%

    (Returns over 12 months are annualised)

    ELSS have an equity element and the net asset value (NAV) of ELSS products is anything but predictable. In a period of 12 months, an ELSS could fluctuate upwards or downwards by anywhere between 10-40%. So while a boom in equity markets (say around January-March) is definitely a good thing for the investing community at large, an investor looking for tax breaks would have to enter an ELSS when it is on the higher side in that period (January-March). The upside on his investments at such a high entry price would be little to medium.

    On the other hand, an investor who has been making moderate investments in ELSS throughout the year would have a lower average price (NAV). This investor could really ride the growth in equity markets, vis-ŕ-vis the investor who invested lumpsum in ELSS during the boom.

    With ELSS offering SIP facility at low levels (Rs 500-1,000) investors can and should really take benefit from rupee cost averaging. The risk in equity markets cannot be eliminated completely. But a little common sense and some financial discipline can go a long way in tiding over risk. With equity markets considerably low at current levels, we believe now is the time to begin investing in ELSS.

     

     

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