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Thanks to the ‘bull run’, ELSS mutual funds are projected as a ‘good’ last minute tax savings instrument. If you are thinking about tax deductions only now, do not use ELSS mutual funds.
Last minute tax-savers are not interested in preaching: how you should integrate tax planning with goal planning, plan for it at the start of the financial year and preferably set it in auto-pilot mode in the right direction. So let me say no more.
If you are looking for tax-saving instruments at the last minute, this is what I think you should do.
Tax savings instruments (80C) can classified into two:
- instruments in which gains are tax free. Example: PPF, ELSS mutual funds, life insurance policies (except term life insurance)
- instruments in which gains are taxable. Example. Tax saving FDs and NSC
Obviously, you would like to choose choose instruments in which gains are tax-free.
However, beware of the choices that exist within this category.
Stay away from all insurance policies (endowment, money-back, ulips etc.). It is like a bad marriage from which you cannot get out unhurt. Want to know why? Read: Here is why you should not mix insurance and investment
So why not ELSS mutual funds then?
People who have already invested in mutual funds (equity or debt), can afford to use ELSS funds as a last minute tax saving instrument.
Those who to wish to begin mutual funds investing with a lump sum purchase of ELSS fund units at the last minute, must think again.
They should ask themselves,
- Why am I considering ELSS mutual funds? Is it because someone I know got good returns from them? Is it because the stock market is ‘doing well’? Is it because a distributor is urging me to buy one?
- Do I understand equity as an asset class? Do I understand that I could lose my principal? Can I stomach the ups and downs of the market?
- Do I understand why an investor should have equity exposure?
- What am I going to do with investment in future? What about next financial year? Will I invest in ELSS again?
Irrespective of your answer, if you are a first time mf investor, stay away from ELSS funds at this time of the year.
Open a PPF account and invest whatever amount you need to there. That is your ideal last minute tax savings product.
Come April, if you are still interested in equity, open a SIP in ELSS funds (yes, yes I have spoken against this but this would at least avoid last minute scurrying.) and proportionately reduce your future investment in PPF.
Do not buy a product you do not understand. Do not use ELSS mutual funds to save tax in the last minute!
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M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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Sir,
Can you please explain why you are against of SIP in ELSS?
Sir,
Can you please explain why you are against of SIP in ELSS?
It is a mess to exit a ELSS sip. Each installment will be locked in for 3Y. It would be better if the investment is made one every quarter. The liquidity is a bit higher. Also the SIP (monthly or Qtly) should be set up for only max 3Y. After that depending on need one can review.
It is a mess to exit a ELSS sip. Each installment will be locked in for 3Y. It would be better if the investment is made one every quarter. The liquidity is a bit higher. Also the SIP (monthly or Qtly) should be set up for only max 3Y. After that depending on need one can review.
Hi Mr Pattu,
I have a question on direct vs regular plan for any equity/hybrid fund for dividends. I know you are the fan of direct and in fact I am investing on direct for the growth ones. But I also need some regular income and invested in direct plan of dividend fund ex hdfc prudence fund. But after i did that, I did this calculation and regular make sense than direct for this category. I tried to spend time on internet / asan etc but can’t find anything related to this.
Ex. HDFC prudence fund – direct nav 30.57 nav – Rs 1l can buy 3271 units. But regular plan can get 3783 units, since the price is 26.43. As far as I know / understand, any fund (or hdfc in this case) declare same amount of dividend for both direct and regular. The last one was Rs1.18 per unit, so the regular one is going to give more income than direct. (based on more number of units)
If the above is correct, is regular better option if some one needs regular income from dividend.
Can you let me know if you get a chance. Thanks
“As far as I know / understand, any fund (or hdfc in this case) declare same amount of dividend for both direct and regular. ” Not true. Direct dividends could typically be smaller. If you want income from direct funds, withdraw! Not from a fund like prudence but from arbitrage funds or debt funds.
Thanks Mr Pattu, That make sense and how stupid I am. I am keep seeing prudence declared recent dividend Rs2 on their website ,but i got only Rs 1.2. So, it is double whammy, more on NAV and less dividend. Not sure what is the purpose of direct dividend stocks like this. If possible can you write on it and educate people like me.
I will check on arbitrage funds . But I don’t prefer debt funds, where dividend is less and DDT is applicable as well.
I understand dividend from equity funds are riskier, but prudence or similar funds, based on past history , the returns are close to 9 – 10% every year (10 years or more). I plan to keep 10% only on this. Thanks
Not true. Direct dividends could typically be smaller. Yes typically, but not always. Today SBI magnum tax gain announced dividend, Rs 5 for direct and Rs 4 for regular , matching 10% of NAV on each case. But HDFC prudence did pay way less for direct.
If you get a chance, pl check my previous comment and let me know your views. thanks
“typically” says a lot! This is a complex subject and I am trying to understand dividend calculation. Getting dividends from arbitrage funds is a smart idea, but why do you need dividends?
Hi Mr Pattu,
I am doing lots of research to maximize my monthly/yearly income. Yes for most part , I am using tax free bonds, bank fds etc so that to get study income (thanks to your bucket strategy). But for some portion (say up to 20%) I am looking to other ways to get 9 to 10% after tax returns. That’s why I am looking into these hybrid equity funds for dividends. HDFC Prudence or similar funds did pay 10% or close to that for long period. Yes, again it depends on at what NAV once buy these. Dividend of 10% on NAV Rs 26 is different than 10% on NAV Rs 20. But based on past dividend history (and NAV history), it is between 8 to 10% based on at what NAV when one buys. (of course one can get 6% as well when funds was bought at peak of 2008). I checked some arbitrage funds, but they also do the same , equity close to 65% and rest in debt. I am not sure what is the difference between arbitrage and these hybrid funds. It looks to me these hybrid funds returns (for dividends) are consistent compare to arbitrage funds dividends and bit higher as well. But I am not an expert and still learning. Please let me know. Thanks
Its a good article to understand avoiding last minute tax saving. When you say “Come April, if you are still interested in equity, open a SIP in ELSS funds” So you are asking to avoid using ELSS in last minute like in month of march but advising to invest in April. Does financial year end have impact on stock market returns? How bad it can be for first time investor to invest 20k in ELSS in march as opposed to beginning of next financial year in april month.?
It is not about April or March. It is about not putting money in anything without understanding risks at the last minute.