ELSS Booklet

7/25/2019 ELSS Booklet

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T X S VINGS WITHTAX SAVINGS WITH

GROWTH PLUSGROWTH PLUS

ELSSELSS


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[2]

We work tirelessly through the year to make our life

better for the present as well as the future, but

strangely, when it comes to tax-saving, we wait till

the last minute to decide where to invest and how

much? And more often than not, we either end up investing in

an instrument which gives low return or has a longer lock-in

period. The other scenario is that of overloading our investment

portfolio with the same asset class. As a matter of fact, most of

us invest in tax-saving instruments just for the sake of saving on

Sail the equity market with the benefit of tax saving

and forced lock-in to meet your long-term goals

GROWTH PLUS T

ELSS


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our taxes. If we invest in tax-saving instruments with proper

planning, not only will our investments fetch us a good return,

but also help us achieve our major financial goals such as ones

own marriage, childrens needs, owning a home and retirement.

However, the choice hinges on our risk appetite, tax bracket and

whether there is a need for regular income. Equity-linked sav-

ings scheme (ELSS) can be the product for you given its three-

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X SAVINGS WITH

AN INVESTOR EDUCATION AND

AWARENESS INITIATIVE BY HDFC MUTUAL FUND

GROWTH PLUS TAX SAVINGS WITH ELSS


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year lock-in period and returns linked to the equity market.

BENEFITS OF EQUITY INVESTINGWe all want to enjoy our life. While some want to enjoy it

with family and friends, others want to retreat to some quiet

place. But what most of us fail to consider is that fulfillment of

any vision requires careful planning and, that too, right from

the start. And it is here that investment in right instruments

come into play, for they can fetch you better returns.As an asset class, equity can provide high returns, but they

also come with their fair share of risks. The challenge lies in

understanding the behaviour of equity markets over a long

period of timenot a year or three years, but over a decade

or even more. Despite some volatility, equity has delivered

the best return in the long run. In the last 10 years, the aver-age return from equity funds has been quite impressive. So,

if you are investing for your long-term financial goals, then

you must have equity in your portfolio. But in the short run,

its a risky asset class. As we have seen in the last few years,

stockmarket volatility could lead to capital erosion from your

equity investment.

Also, in order to create wealth over the long term, one

needs to put savings into assets that can deliver higher than

inflation returns. Else, inflation will eat into the returns and

wont help you in accumulating a corpus. Whatever be your

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risk profile or the quantum of savings, its imperative to use

equity-backed investment products to nullify the effect of in-

flation, especially over the long term. The veracity of using

equity to meet long-term goals have been proven time and

again. Studies done in the past have shown that equity has

delivered higher inflation-adjusted return than any other

asset class over the longer horizon. The underlying message

here is the time horizon; the longer one remains invested in

equities, the better is the return. The advantage comes from

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the power of compounding because the earlier you start in-

vesting, the more time your money gets to grow. If you start

saving early, even in small amounts, it will help you build asizeable 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 lon-

ger 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 im-portantly, 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-effec-

tive way for the small investor to access equity markets.

WHAT IS ELSS AND HOW IT HELPS?

Equity Linked Savings Scheme (ELSS) launched by mutual

funds are open-ended schemes having a lock-in period of three


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years (with no assured returns) and are formulated as per

the notification dated 28 December 1992 as amended on 22

December 1998 and the notification dated 3 November 2005

as amended on 13 December 2005 issued by the Departmentof Economic Affairs, Ministry of Finance, Government of In-

dia. Further, the Ministry of Finance vide its press release dat-

ed 11 November 2005 stated that the Central Board of Direct

Taxes (CBDT) has clarified that investment made on or after 1

April 2005 in the schemes which are in accordance with ELSS

1992 or ELSS 1992 as amended in 1998 are also eligible for

tax benefit under Section 80C of the Income tax Act, 1961.

Investment in ELSS helps one in planning ones taxes, there-

by reducing the tax burden. ELSS investments reduce the

taxable income corresponding to the amount invested and,

thereby reduces the tax liability of the investor under Section

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80C. As the name suggests, ELSS is a savings scheme that is

linked to equity. Investment avenues for your savings can be

a mix of various asset classes such as equity, debt, gold, real

estate and so on. An ELSS is an MF scheme, which is similarto any diversified equity MF scheme that routes your invest-

ments into the equity markets. Like any other MF scheme, an

ELSS is also managed by professionals known as fund man-

gers. This helps small investors in accessing the equity market

and also save taxes at a reasonable cost.

INVESTMENT WITH SMALLER AMOUNT

ELSS allows the investor to buy units under a scheme with

a minimum investible amount of `500 and in multiples of

`500 thereafter. Investments can either be in lump sum or

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through the system investment plan (SIP) route. But, consid-

ering the volatility in the stockmarkets, it is better to invest in

ELSS through the SIP route. You get to make your investmentsin 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 eligiblefor a deduction from income up to `1 lakh.

THE COST FACTOR

Every investment has a cost attached to it. However, after the

capital markets regulator, the Securities and Exchange Board

of India (Sebi) abolished the entry load on all MF schemes in2009, one doesnt have to pay any upfront load on ones in-

vestment. That said, there is still a transaction charge on your

investment if you are a first time mutual fund investor and

wish to invest through a broker. This could be up to `150 if

your investment amount is `10,000 in a year. But if you in-

vest directly with the fund houses, there is no charge on your

investment. Still, you will have to bear an indirect cost known

as recurring expenses on your investment. In simple terms,

the net asset value (NAV) declared by the funds are adjusted

and reduced by this percentage on a regular basis. Theoreti-

cally, the recurring expenses chargeable could be up to 3 per





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cent per annum of the average assets of the scheme. However,

in practice, such expenses would rarely exceed 2.50 per cent.

This is because of competition and regulations that requiresuch charges to be on a sliding scale and is based on factors

such as average assets. Recurring expense includes expenses

incurred on the investment management and advisory fees,

expenses towards brokerage, registrar, marketing, fees of cus-

todian, auditors, trustees and certain other expenses as well.

As per directives from Sebi, mutual funds have introduced

Direct Plan for investors who purchase or subscribe units

in a scheme directly (i.e., not routed through a distributor)

effective 1 January 2013. Direct Plan shall have a lower ex-

pense ratio excluding distribution expenses, commission, etc.

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Also, no commission for distribution of units will be paid or

charged under Direct Plan.

ALL ABOUT ELSSOPTIONS, LOCKINS

Options.The ELSS funds available may either be the on-go-

ing funds which declare their NAVs on a regular basis, or the

new ones, called the new fund offer (NFO), which are in the

process of mobilising funds from investors and will declare

their NAV in future.As an investor, you can either choose the growth or the divi-

dend option. Some funds also have the dividend re-investment

facility. For making an ELSS investment, you first have to de-

cide on the mode of investment, either lump sum or through

SIP and then choose the growth or the dividend option.

A growth option allows capital appreciation due to the com-pounding nature of the investment while the dividend payout

option provides liquidity. To some investors, this is a good op-

tion as an ELSS has a mandatory three-year lock-in period.

The dividend from the ELSS investment can be invested in

other investment options, either equity or debt, depending

upon the rebalancing needs of the investors portfolio and,

thereby, reduce the risk in the overall investment plan. From

the tax perspective, both the dividend and the growth op-

tions are equally efficient as the dividends are tax-free. As far

as dividend reinvestment goes, investors should avoid it. One

cannot change the investment option midway in a fund with

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a lock-in period. Thus, if you were to choose the dividend re-

investment option, there will be incremental lock-in of three

years on the dividend reinvested and no tax deduction can beclaimed 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 be-come open-ended three years into their purchase by an inves-

tor 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 pro-

duction of the requisite documentary evidence, will be able to

redeem the investment only after the completion of one yearor 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 advo-

cated 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. Be-

sides, when compared to other tax-saving instruments, such

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as the National Savings Certificate (NSC) and Public Provi-

dent Fund (PPF), which have lock-ins of six and 15 years, re-

spectively, a three-year exit restriction is on the shorter side.

The lock-in also lends an element of stability to ELSS portfo-lios. Since corporate money is kept out, these schemes dont

have to deal with sudden, large-scale redemptions. As a re-

sult, 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 predict-

able and also leaves fund managers with less burden of manag-

ing redemption. This provides the fund manager with greater

freedom to perform. The fund manager can take a medium- to-

long-term view on certain stocks; this helps in improving the

returns from the schemes. The lock-in-period of three years in

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ELSS also allows the investor to become more disciplined and

realise the true potential of the investment made.

The asset allocation is as per the ELSS guidelines. The fundsare typically invested in equities, cumulative convertible pref-

erence shares and fully convertible debentures and bonds of

companies in the 80-100 per cent range and up to 20 per

cent for debt and money market instruments. The asset allo-

cation in itself speaks for the big tilt towards the equity mar-

ket. Therefore, ELSS is well-poised to deliver better returns.Liquidity.The units of ELSS plans have a lock-in of three

years from the date of their allotment. These units can be re-

deemed i.e., sold back to the fund house on every business day,

at the redemption price, three years after their allotment.

HOW TO CHOOSE ELSS SCHEME MARKET CAPS,SCHEME OBJECTIVES, PERFORMANCE

Before selecting an ELSS, ensure that your investment takes

into account your risk profile and the overall asset allocation

of your portfolio. Remember that higher returns from ELSS

come with higher-risk, for the simple reason that the invest-

ments are market-linked. These schemes are suitable for in-

vestors willing to take higher risk for better returns from their

tax-saving investments.

Choose funds with a longer performance history and track-

record for investments. The longer the performance history,

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stocks as far as portfolio building is concerned. Also the three-

year lock-in reduces the risk in equity investing to a great ex-

tent and allows the fund manager to choose stocks with long-

term potential without liquidity concerns. One should alsolook at the type of fund management style ELSS funds carry

and whether they invest in value or growth stocks. The big-

gest 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.

HOW MANY ELSS SCHEMES SHOULD ONE HAVE?

There is no fixed rule to this. Around 2-3 schemes can be a

part of your portfolio depending on your investment amount.

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It helps you diversify across different fund managers too. Too

much of them could be a deterrent as well. Managing them

and tracking them will be difficult. Besides, there could beoverlaps in the stocks they hold, thus reducing the advantage

of a concentrated portfolio. Have a look at their individuals

portfolios to determine the mid-cap or the large-cap focus of

the funds and then take a decision.

HOW LONG TO REMAIN INVESTED IN ELSSIdeally, there is no maximum limit on the time horizon you

can remain invested with the fund. However, once the three-

year lock-in period is over, you need to closely monitor the

schemes performance. If it is at par with other open-ended

equity schemes, you can remain invested with the scheme.

But if the scheme is lagging on performance, you can switchto better performing equity saving schemes.

Also, if your existing investment has completed three years

and you have to invest again for the current year, you may like

to reinvest the corpus in the same scheme to get the tax benefit

of the current year without having to make any additional in-

vestment provided the scheme performance is at par with its

peers. If your ELSS investment made in the past is about to ma-

ture in the next 3-6 months, you need to decide carefully. Once

you complete three years in an ELSS, review your investment.

After all, one of your objectives (the tax deduction) has been

met. Tax laws dont allow a rollover for claiming benefit under

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Section 80C. They insist on fresh investments. So, evaluate your

matured ELSS investment as a normal equity investment and

base your decision to stay on or exit on your perception of themarket and the need for funds. You could either liquidate all or

partial units. But if you dont require funds urgently, postpone

liquidation to few more months.

ELSS TAX BENEFITS INCLUDING FOR SIP MODE

Lump sum or in instalments. You may either invest inlump sum or choose the SIP mode. Identifying the scheme and

starting a SIP would ensure that the investor benefits from low-

er acquisition costs through rupee cost averaging in a volatile

stockmarket. Investing periodically also spreads the burden.

However, remember that each instalment will be subject to

a three-year lock-in. So, if you enroll in a three-year SIP andinvest systematically every month for three years, you will get

your entire proceeds only after six years (after your last instal-

ment at the end of the third year completes three years).

HOW TO GET STARTED WITH ELSS

When you start working, the savings for tax-saving invest-

ments could typically be your entire savings, as the expenses

are pretty high at this stage of your life. Like the rest of your

working life, during this period too, your provident fund sav-

ings will by default take up some portion of the total deduc-

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tion under Section 80C of the Income Tax Act, 1961. Dur-

ing this stage of your life, since you are likely to be withoutmajor 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.

ROLE OF ELSS IN INVESTMENT PORTFOLIO

As discussed earlier, its best not to own more than 2-3 ELSS

in ones portfolio. Also, ELSS should be treated as part of the

overall portfolio and not merely as a tax-saving instrument.

By keeping a few strategies in mind, an investor can make the

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most of his or her investment.

Keeping inancial goals in mind.Every ELSS adopts dif-

ferent stock picking strategies. Some schemes maintain a large-cap focus and are suitable for investors who have a lower risk

profile. On the other hand, funds that have greater exposure to

small- and mid-cap stocks fit the portfolio of an investor willing

to take a higher degree of risk. Ignoring this aspect could lead

to a mismatch between the fund and the investors profile.

Diversify among styles.The role of ELSS in a portfolio isrestricted to providing tax benefits without compromising on

the return. It cannot form the core of your MF portfolio. A

portfolio should at most stick to two ELSS with varying invest-

ment styles in the market if one wishes to diversity.

USING ELSS FOR LIFE GOALSMARRIAGE,CHILDS FUTURE, HOME BUYING & RETIREMENT

Investors can use ELSS investment to fulfil their life goals, such

as their childrens future, retirement planning and home buy-

ing. The only thing one needs to do is link his or her goals with

the time horizon left for each specific goal. As a rule of thumb,

an investor should focus on the tenure left for each goal rather

than his or her risk profile. For instance if one is married, his

or her income would have gone up further and so would have

their Employees Provident Fund (EPF) deduction. This would

leave the investor with lesser elbow room for making invest-

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ments under Section 80C of the

Income Tax Act, 1961. If pos-

sible, one should increase themto exhaust the Section 80C lim-

it. In case of a double income

households, one should ensure

that most of the tax-saving in-

vestments is from the income in

the higher tax slab. If both theincomes are in the highest tax

slab, the risk-taking capability

is higher. This means that such

working couple should invest

more in ELSS, besides both of

them investing in PPF. This corpus can either be utilised forfunding the retirement expenses or for the childrens future.

Also, a childs education, his or her wedding, buying a

house, or retirement require planning as these are long-term

goals. As such, they will require disciplined investing on your

part. Besides, you should also ignore booking profits for the

short-term or else you could end up losing on the compound-

ing effect on your long-term investments. It is here that the

lock-in associated with ELSS comes handy and prevents the

investor from booking profit for the short-term.

Even a person nearing retirement or one who has already

retired, may invest in ELSS, if he or she has an appetite to take




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slightly higher risk to get better return.

As one nears retirement, one typically likes to invest in op-

tions that dont have lock-ins. It is better to keep investing inexisting investments such as PPF and better still, to increase

the contribution to ones EPF since one will be getting the

money shortly and, also to give further impetus to the com-

pounding effect.

As such, plan your investments in ELSS keeping in consider-

ation the year you will be retiring. Remember that you needto remain invested in equity even in your retirement years to

take care of inflation.

When you are retired, your obligations under Section 80C

might not be much. In addition to fixed income tax savers

such as Senior Citizens Savings Scheme (SCSS) and others, if

you need to save taxes, you may still look at ELSS. The key isto ensure that not all of your investments are in fixed income

investments since they wont help you combat inflation.

The two facets that makes the ELSS plans stands apart from

a normal diversified equity plan is the tax-saving feature and

their link with the equity market and, because they are equi-

ty-linked, always remember that there is a certain amount of

risk involved: equity schemes are not for the weak-hearted.

Ultimately, you are the best judge of where to invest and

what suits your portfolio best. Let us leave you with one last

thought. If you are planning to invest lump sum in ELSS dont

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wait till the last minute. Whenever the stockmarket falls by5-10 per cent, invest some part of it during every correction

to capitalise on the potential uptrend. However, it is better to

invest using a systematic investment plan (SIP) that reduces

the average cost of your holding in a volatile market.

COMMON MYTHS TO AVOID

There are some common myths always associated with ELSS

investments. That needs to be avoided. Some of the common

myths are that low NAV funds are cheaper, dividend declara-

tion in next week or so on, short-term investments, etc. These

three are the most common tricks MF distributors use to lure




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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 condi-

tions that made a fund an outperformer during a particular

period may not exist in the subsequent years. A funds perfor-

mance should be tested for consistency across time periodsand 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 declar-

ing dividend soon at the time of your investment. However, in

the future, it may declare dividend and also reward you hand-

somely in the long-run in terms of its performance.


AWARENESS INITIATIVE BY

HDFC MUTUAL FUND


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ELSS Booklet

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