Most of the taxpayers delay their tax-savings investments till the last quarter, and some till last month of the financial year. Even in the case of Equity Linked Savings Schemes (ELSS), around 30–50% of total investments in ELSS are made in the last 3 months of the financial year. However, ELSS is a market-linked instrument and hence, is always susceptible to the volatility in the equity markets. For someone who is not adept at timing the market, SIPs in ELSS starting right from the start of the financial year makes more sense than investing in lump sum. However, if you are one of those who are yet to start investing in ELSS, this may be the right time for you to get started. Here is why:
Benefit from the current correction: The election of Donald Trump as the next President of US has spooked the markets everywhere, including that of India. Adding fuel to the fire is the demonetization process. The BSE Sensex has already come down by around 9% from its 52-week high of 29077 touched in September this year. Investing lumpsum in ELSS now will allow you to purchase the mutual fund units at much lower prices.
Benefit from short-term uncertainty: Major upcoming global events such as Federal Reserve’s possible rate hike and uncertainty regarding Trump’s foreign and trade policies will keep equity markets very volatile in the near short-term. Demonetisation is also likely to adversely affect the domestic consumption, thereby, reducing the third quarter corporate earnings. This may pull down equity markets further. The equity market can be expected to remain this way till the Budget Session starting on February 1, 2017. Thus, make most of this volatility by investing in ELSS in a staggered manner during every dips in the market. Remember, the last bull run in the market started right after the presentation of Union Budget this year (2016).
Avoid TDS deductions from your salary: Generally, employers require their employees to submit their proof of tax-saving investments by the end of January. If you postpone your ELSS investment to the month of February or March, you may not be able to submit your proofs by the cut-off time. Hence, TDS on the deficient amount will be deducted from your salary even if you make up the deficient by the end of the financial year. For example, assume that you will invest Rs 1.5 lakh in ELSS fund(s) in the March-end while your employee requires you to submit your investment proof by the end of January. On failing to submit the investment proof by the set timeframe, TDS of up to Rs 46,350 (depending on your tax-slab) will be deducted from March’s salary.
Avoid mistakes resulting from last-minute haste: Ideally, a lot of factors should be taken into account while choosing an ELSS scheme, such as the past performance of the scheme, portfolio composition of the scheme and track record of the fund manager and the fund house. With over 40 ELSS scheme to choose from, this may require some effort and time. Making investment in the last-minute may not allow you to do the required research. With a lock-in period of 3 years, this may lead you to make costly mistakes.
As the equity market is in a correction mode and mid cap stocks still highly over-valued, prefer ELSS funds with higher exposure to large cap stocks.
List of best ELSS funds along with their portfolio composition:
| Fund Name | Portfolio Break-up in terms of market capitalisation | |||
| Giant Cap | Large Cap | Mid Cap | Small Cap | |
| Axis Long Term Equity Fund | 48.78% | 21.16% | 29.02% | 1.03% |
| Franklin India Tax Shield Fund | 62.46% | 18.59% | 17.62% | 1.33% |
| DSP Tax Saver Fund | 49.89% | 18.82% | 25.23% | 6.07% |
| Reliance Tax Saver Fund | 26.09% | 18.82% | 39.28% | 15.00% |
| ICICI Prudential Long Term Equity Fund | 30.81% | 23.23% | 40.45% | 5.51% |
| Category Average | 44.74% | 17.42% | 30.84% | 7.71% |
Ideally, your ELSS investments should be done through the SIP mode right from the start of the new financial year. Investing in ELSS through SIP allows you to spread your investments over several months and reduces pressure on your liquidity at the end of the financial year. SIP also allows you to average your investments from the ups and lows of the market. However, with just 4.5 months remaining in this financial year, SIPs in ELSS is not advisable now as they require at least 6 months of consecutive investments. With just the lumpsum option available, the present uncertainty in the equity markets provide the best opportunity to invest in ELSS. Instead of investing in ELSS at one go, purchase ELSS in small tranches at every dips in the equity market.
By Manish Kothari, Head of Mutual Funds, PaisaBazaar.com
(Published in deccanchronicle.com on November 28, 2016)