ELSS through SIP- A great saving instrument for salaried Class

Every one of us saves certain amount of money every month from our salary to get the benefit of Income tax exemption under 80C of the Income tax Act. As you are aware, we can claim 100% income tax exemption for this savings up to Rs.1 lakh. But are we prudent in using this opportunity to get the maximum benefit out of this? Of course some of us do and I hope rest of us will do so after reading this article.

This article is about the advantages of saving in ELSS (Equity Linked Savings Scheme) of a quality Mutual Fund through Systematic Investment Plan.

I recently saw series of advertisements in TV about a Mutual Fund. The Concept of those Ads is very simple and yet very powerful. A guy or a girl will be wearing a dress with printed words, which identifies his/her career (say a guy who wants to make a career in cricket will be wearing a shirt with slogan “Cricketer”, likewise a girl who longs to be a beauty queen in a beauty pageant would be wearing a shirt with a slogan “beauty-contestant” and so on). In addition, these guys/girls will have two sign boards, one in each of the two hands. She/He will show One sign board conspicuously but with a bit of disinterest. Let’s say this is Sign Board-1. The same Guy/girl will also show the other sign Board inconspicuously but in a jubilant manner. We will name is board as Sign board-2. The following table shows the wordings in Sign Boards 1 and 2 carried by our personalities.

Personality Sign Board-1 Sign Board-2
Cricketer World cup Ad shoots
Beauty contestant World peace Bollywood
Politician Vote Note
Bride Pious man Wealthy Man
IIT Student Work for Indian Company US green Card

Got their Point? I really like this concept as you do! Though this is comical, these ads propose the double benefit of an Equity linked savings Scheme i.e Tax exemption and Capital growth. Is it true? Yes! ELSS mutual funds have 3 year lock in period, Fund Managers have the freedom of keeping the fund fully invested rather than have a cash of around 30% in their pocket without investing the same in the market in the fear of redemption pressure as in the case of open-ended Mutual funds. So, every rupee you invest in the ELSS woks for you. This would end up in more growth of your hard earned money.

Is it safe to invest in ELSS funds? Yes. All approved mutual funds in India are monitored by SEBI (Security Exchange Board of India- An independent body constituted by Government of India). I mean to say according to ups and downs of the stock market mutual funds may fluctuate. But they are fraud-proof.

As like other Mutual fund Schemes, ELSS is also directly linked with Stock Market. So you may presume an erosion in your investment in the event of Stock Market Crash. For the Short-term of course you will have a setback. For the medium term and long term (5 years to 8 years and 15 to 20 years respectively) you can surely get a growth of around 25% to 45% calculated on annual basis.

Coming to the main point of this article, now you are inclined to invest in an ELSS for tax benefit. Will you do it in a stroke at the end of a Financial year, as you normally rush for Indira Vikas or NSS Certficate during every February? No. This is not a correct way of investing in Mutual funds. You have to do it systematically by investing a uniform amount every month throughout the year which is known as Systematic Investment Plan in the Market Parlance. SIP is applicable for all Mutual fund investments. By SIP you will get the benefit of averaging, which the an expert does with much toil. But with SIP even the novice investor does the tricks of the stock market such as rupee cost averaging, Contra buying, bottom fishing, etc., and at the same time without knowing nothing about these tricks of the trade. This is because when you invest through SIP and if the stock market is up your monthly investment buys less units and when the market is down you will end up in buying more units. This will help in averaging your price/cost. Secondly, if a person deals in the stock market directly, when market crashes he would not buy due to negative sentiments and in the fear of another. In this way he misses the opportunity to buy in the dips and selling in the highs. But through SIP we just avoid this error by investing at regularly throughout the year and over time; it will work on investor’s favour only.

The following statistics is about an ELSS started at 1996 with the face value of Rupees 10. If you had invested Rs.1000 per month from the inception in this ELSS you will have invested Rs.1,38,000/- over this period (138 months X Rs.1000). Now see the value of units you hold as on 31 December 2007. Whopping 23.25 lakhs for an investment of Rs.1,38,000 and that too in installments! In fact, this ELSS, which I had taken for discussion (HDFC TAX SAVER FUND) has been ranked as 27th for this year by the financial experts. If the ELSS ranked 27th has performed for an annual return of 45% through out 13 years, just imagine the performance of other funds which were ranked from 1st to 26th.

SIP Investments Since Inception 10 Year 5 Year 3 Year 1 Year
Total Amount Invested (Rs.) 138,000.00 120,000.00 60,000.00 36,000.00 12,000.00
Market Value as on Dec 31, 2007 2,325,025.28 227,076.11 66,544.66 1,366,130.11 15,648.59
Returns (Annualised)*% 45.02% 56.14% 44.29% 45.72% 60.83%

Let’s be frank. Can our traditional tax saving instruments such as GPF, NSS, PPF etc., would give returns like this? You may say, Stock market was bullish during the period from 2003 to 2007 but bearish trend has set in this year and the market would further bottom out in the coming years. I do accept this Point, but even if we will not get an aggressive returns like this, we are poised for returns of around 15% to 25%, which is definitely more than the traditional tax saving instruments.

I invite feedback whether it’s positive or negative from all the readers, for the purpose of having healthy discussion in this topic.