ELSS : Tax Savings Plus Wealth Creation

  • If you are young and have more years of service ahead, you can put a major portion of your tax saving investment in equity linked savings scheme
  • ELSS is mutual fund investment, which also gives you tax benefit. Here is how you can use it to work for you in terms of investment and taxation

The beginning of a financial year is a good time to plan your investment. It is also a good time to put your money in investment basket and get tax benefit as well. One such product is equity linked savings scheme (ELSS). ELSS is mutual fund investment, which also gives you tax benefit. Here is how you can use it to work for you in terms of investment and taxation.

What is it?

An ELSS scheme invests in equity mutual fund. “At least 65% of the corpus is invested in equities. It cannot be less than that.
These funds are meant for long-term wealth creation by participating in equities and should be able to deliver alpha (active returns) over the benchmark.

According to Value Research, currently around 37 asset management companies provide open-ended ELSS schemes and six asset management companies provide close-ended ELSS schemes. the total number of open-ended schemes in the market is 42 whereas the number of close-ended ELSS schemes in the market is 28. There are no sub-categories or types within ELSS schemes as such but the customer has the liberty to choose among ELSS schemes that invest in small-, mid- and large-cap stocks.

As an investor, you can choose either the growth or the dividend options in ELSS schemes. “In growth schemes you will get a lump sum on redemption. In dividend option, you will get regular dividends from the profit generated by the scheme,” said Krishna Kumar. According to financial planners, a growth-based ELSS scheme generally fares better than dividend-based ELSS schemes. “When you are paid a dividend out of your ELSS scheme, the net asset value (NAV) takes a hit. If you need money after your lock-in you can always redeem it without affecting the NAV of the scheme at all. Hence a growth scheme is better,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories. If you have a salary income and are not looking for regular income from your investment, then you should opt for growth option. “Also you cannot be certain that your scheme will generate returns and the fund manager will declare a dividend. For example, in the year gone-by, the returns were hardly 2-3%,” said Sadagopan. If you invest in ELSS, you can claim tax benefit under section 80C of the income tax Act for up to ₹1.5 lakh.

Considering ELSS in your portfolio

There are a couple of parameters that you can keep in mind before zeroing down on a particular ELSS scheme. “Consistence in beating the benchmark, historical returns, the kind of underlying assets they invest in, fund manager’s performance and expense ratio are some of the parameters you should look at,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors. According to financial planners, you should not have more than two ELSS scheme in your portfolio. “Depending on your age and risk profile you can decide which kind of ELSS scheme suits you but multiple schemes are not required,” said Melvin Joseph, founder of Navi-mumbai based Finvin Financial Planners.

Remember that ELSS has a three-year lock-in, hence, you can withdraw only after three years. “If the scheme continuously underperforms after the lock-in period, you can pull out from the ELSS scheme. If you want to invest gain after pulling out for tax-saving purposes, then you can look at a different ELSS scheme. For the same reason, when you are studying your scheme’s performance and returns, it is essential to compare it with the performance of the peer schemes and then analyse if it is underperforming or not,” said Dhawan.

Now are you wondering of all the 80C options, where does ELSS stand? “It is difficult to compare ELSS with other taxsaving options because of the difference in the nature of products. Let’s take the example of PPF. ELSS and PPF are inherently different products so who should invest in which product is completely contextual and depends on your risk profile,” said Sadagopan. If you are young and have more years of service ahead, you can put a major portion of your tax saving investment in ELSS as equity investment can help in growth.

Source : Live Mint

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Behavioural Mistakes To Avoid While Investing

It’s often said that an investor’s worst enemy is he himself. If our house is on fire, we listen to our intuition and run for safety. This helps us survive. However, in the case of investment decisions, this behaviour can land us in trouble. The moment we see signs of panic in the stock market, we run to sell all our stocks; when we see euphoria, we jump into the market. We tend to behave irrationally and in a biased manner in many investment situations. 

Our long-term investment success is determined by our ability to control our‘inner demons’ and ‘psychological traps’. The good news is that human behaviour is irrational in a predictive manner, as examined by Professor Dan Ariely in his book ‘Predictably Irrational’. Once we recognise these ‘inner demons’, we can develop approaches to tackle them. A thoughtful investor can leverage this predictable irrationality by remaining un-swayed by the noise and making rational decisions, thereby taking advantage of others’ ‘behavioural biases’. One of the inner demons is ‘over-confidence’. Time and again we tend to overrate our ability, knowledge and skill. Watching 24-hours news channels and listening to ‘experts’ we tend to believe that we are experts and make investment decisions that are not thought through. We think we can predict and time every up and down of daily price movements and invest accordingly. Overconfidence can lead to excessive trading and poor investment decisions. To be a successful investor, one needs to follow a zero-based approach towards decision-making. Investors need to be prudent to not sell their winners too soon and nor hold on to their losers too long.

Another important psychological trap we need to avoid is ‘herding’. People tend to follow the actions of a larger group, independent of their own knowledge. Large-scale social imitation can lead to significant gaps between actual value and price. This herd-like behaviour phenomenon can create profitable opportunities for an individual stock. But taking advantages of collective irrationality, either for a specific stock or for the market as a whole, is difficult. Since most of us have a strong urge to be part of the crowd, acting independently is not an easy feat.  However, if we’re able to control this behaviour, it can result in significant investment gain for us. Warren Buffet sums this up by saying: 

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

 It requires significant control over one’s emotions to practice in real life.  Focus on avoiding silly behavioural mistakes. Research has shown that behavioural mistakes can reduce the return on investments by 10% to 75%. So what do you need to do avoid this? It can be summarized in one word: discipline. One need not always focus on becoming smart. Avoiding silly behavioural mistakes can help one become a successful investor in the long-term. Warren Buffet once said, “You only have to do a very few things right in your life, so long as you don’t do too many things wrong”. If we can avoid making a big mistake, the right decisions would take care of themselves.  As the central theme of the Mahabharata, the battle for investment success is about systematic adherence to dharma – financial dharma. As stated in the epic, “The road to heaven is paved with bad intentions.” Our journey towards financial heaven is filled with inner demons, which need to be identified and tamed for long-term superior returns. Just as mental discipline and willingness are required to forego short-term pleasure to wake up every day and jog for good health, a similar discipline and willpower are required to follow the simple but powerful mantras of enhancing long-term financial health. 

 Key Takeaway Points • Always use a ‘checklist ‘approach towards entry/exit of stock. Keep it short and reasonable.  

• It is better to do your due diligence before investing. Keep a safety margin while ; never invest to lose.

• Adopt a ‘buy and hold’ strategy with periodic review.

• The less frequently you track the market and check your portfolio, the less likely you will be to react emotionally to the natural ups and downs of the stock market.

• Be more thoughtful while taking a long-term investment decision. Losing one day’s return will not matter if you want to keep the stock for 10 years. When you see a sign of panic or euphoria, the best advice would be to wait for another day. If the investment is meaningful from a long-term perspective, the opportunity will continue to remain a good one, even in the future.

• Have appropriate asset allocation, and rebalance your portfolio periodically.

• Be humble, and learn from your mistake. When you succeed, evaluate which of your actions contributed to the success, and which ones did not. Don’t claim the credit for successes that have occurred by chance. Avoid rationalisation when you fail.

• Don’t exaggerate the role of bad luck in your failures

Happy Investing!

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