Equity diversified NAVs ended higher Wednesday with advance:decline ratio of 221:23 as the Equity benchmarks witnessed consolidation throughout the session on Wednesday, ahead of F&O expiry tomorrow for the month of June. First half of trade was negative with modest losses on weak global cues and the Nifty struggled at the 5300 level. However, the Nifty managed to hold 5300 in the last couple of hours.

The 30-share BSE Sensex closed yesterday at 17,755.94, up 6.25 points while the 50-share NSE Nifty rose 6.60 points to 5323.15.

In an interview with CNBC-TV18, Kartik Varma, Co-Founder, iTrust spoke on whether SIP investment or investment through ELSS was the right way to go for investors.

Q: I am having HDFC Tax Saver Growth Fund and Franklin Templeton Tax Shield. I have been holding them for last 4 years. HDFC Tax Saver Fund, it’s almost doubled its value. I invested Rs 40,000, its value is about Rs 75,000 or so. So I want to know whether I should book profit, I mean should I sell them and then I reinvest them through SIP or I continue to hold them. I don’t need money that I should sell it.

A: I think both the funds were probably made as ELSS investments a few years ago. I would encourage you to think about what kind of a financial goal you had set aside this amount of capital for when you first invested. Just because a fund has doubled doesn’t mean that the fund is necessarily expensive at this point in time.

On the contrary, there still might be a lot of value that the fund can offer for you if you continue to hold going forward. You also mentioned you have got certain other funds in your portfolio. Think about which are those funds you might want to get rid of and consider any decision you make looking at your portfolio holistically rather than just looking at one particular type of fund that you hold at this point in time and considering an exit out of that because it doesn’t really make any sense just because the funds doubled in value. It could double from this point forward as well just given the long term potential for the Indian market.

Q: I would like to invest Rs 1.5 lakh to Rs 3 lakh in mutual fund in bulk for the horizon of one year, minimum one year. So is it a correct time to invest in mutual funds?

A: I think one year is definitely the wrong time period to be thinking about if he wishes to invest into equity mutual funds. On the other hand, if he is looking just to park his money that he claims he has in bulk at this point in time into some kind of ultra short term fund or a debt fund, one year might be advisable, rates are also going up so he can get some benefit of that if he were to invest correctly.

But if he has already got 7 different equity mutual funds I am assuming then he ought not to be investing into a new fund. There’s always a risk that retail investors face of getting overexposed to a certain sector just because they end up investing in 7 or 8 to 10 different funds that ultimately end up owning the same underlying securities.

So he should just be very cautious about putting money into a fresh new fund but rather just invest in the pre-existing funds that he already holds and think about his time horizon very very cautiously.

Q: At this point of time given the volatility, given the kind of global concerns, are you advising clients more to opt for the SIP route or if somebody has a long term horizon of 4 to 5 years, you are pretty okay telling him that you can put it in bulk as well?

A: It’s only with hindsight that one can recognize whether one got one’s timing right when one puts in fresh money into the stock market. For retail investors, I think it’s always advisable and perhaps preferable to put money through a systematic investment plan route rather than just put bulk money in.

Often retail investors also don’t have too much of surplus cash just lying around if they are salaried individuals. So if you are looking to invest money into the stock market going forward given the existing context of global volatility and so on, the SIP route is probably the way to go for you.

Source : Money Control

ELSS or SIP: Which route is best for your investments? is a post from: Indian Stock Market Tips

Most of the tax saving instruments that fall under Section 80C is saving oriented with returns after adjusting for inflation. The exceptions are the ULIPs (Life and pension funds) and the ELSS (Equity linked savings scheme) mutual funds.

The basic advantage of opting for ELSS as compared to the ULIPs is the frequency—mostly a single investment or a monthly investment for a year—and term for investment, for getting good returns.

The handy guide to ELSS mutual funds

1. What is an ELSS?

ELSS is a mutual fund that has to invest a minimum of 80 per cent in equity shares. The balance 20 per cent can be in debt, money market instruments, cash or even more equity.

There is a 3 year lock-in period for the ELSS mutual funds. Post the 36 months, the funds remain invested and work like any other open-ended mutual fund.

2. What are the advantages?

It is an established fact that in the long run equity gives a much higher inflation adjusted returns when compared to any other investment (except for maybe real estate). The top 5 ELSS funds have given returns from 22 per cent to 26 per cent compounded annually over the past 5 years. This is again higher than the market (Nifty) returns over the past 5 years which is at 19 per cent.

ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1 Lakh. This gives the tax payers benefits from 10 per cent to 30 per cent (excluding the educational cess) based on their current tax slab.

The return (maturity and the dividend [if opted for]) from the ELSS is also tax free under the present EEE (Exempt–Exempt–Exempt) regime.

The 3 year lock-in period ensures that you don’t withdraw your investments. Generally in a normal mutual fund the tendency to withdraw in case of any monetary requirement is more.

The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable investments as they do not have to worry about sudden redemption pressures.

The returns achieved by an ELSS fund have consistently been higher as compared to the market returns. Only some sector based mutual funds have given better returns than the ELSS fund in the past 5 years.

3. Which one to pick?

If you are on a tight budget, opting for a monthly investment (SIP using ECS) makes complete sense. The automatic investment from the bank through ECS makes it an easy way to invest.

In case if you are looking for an income in between, you can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax free return compared to a bank or company deposit, which is taxable.

4. What are the limitations?

The investment in an ELSS cannot be switched or closed before the 3 years are completed from the date of investment. During market downturns, this becomes a limitation as you can’t do anything much except watch the funds go down. You do have the option of averaging when the market goes down, but an investment to save tax may not be required when the market is on a downslide.

The lock-in works negatively for the monthly investment as well. Since the lock-in period is calculated from the date of the investment and not from the date the scheme was started, the 12th month’s investment can be withdrawn only on the 48th month. This is a disadvantage compared to ULIPs, where the lock-in is from the date of start of the scheme.

5. What’s the final verdict?

Most fund houses start an ELSS regular investment at Rs.500/- per month. Single investments start generally at Rs.5000/-. This makes ELSS accessible to all tax payers. With the compulsory lock-in giving better returns than other investments, even the most risk averse can look at an exposure to the ELSS fund for their tax benefits.

Also Read : Before investing in ELSS

ELSS mutual fund – An investor’s delight is a post from: Indian Stock Market Tips

HDFC Mutual Fund has announced dividend under HDFC TaxSaver — an open-ended equity linked savings scheme. The fund house has fixed March 4, 2010 as record date for the dividend declaration.

The amount of dividend declared is 60%, or Rs 6 per unit, on the face value of Rs 10 each. As on February 26, 2010, the net asset value of the scheme stood at Rs 60.298 per unit.

The investment objective of the scheme is to achieve long-term growth of capital.

Dividend declaration under HDFC TaxSaver is a post from: Indian Stock Market Tips

• ELSS or SIP: Which route is best for your investments?
• HDFC MF Fined by SEBI for Dealer’s Share-Trading Fraud
• ELSS mutual fund – An investor’s delight
• HDFC MF to introduce HDFC FMP 14M March 2010
• Does your tax planning give you a break or does it break you?
• Before investing in ELSS

Of the investments in Section 80C, ULIPs and ELSS (Tax Saving Mutual Funds with 3 years lock-in)could be considered by investors with a long term (above 7 years and 3 years respectively)investment purpose. EPF is unavoidable for the salaried employee, so it becomes an automatic investment.

A look at the various tax saving tools available and their significance in your personal finance life.

While the role of the Tax Man is to maximize the tax collection, he also gives tax breaks that reduce the tax paid by us. On the surface this looks very contradictory to the objectives. But it makes sense when we have a holistic picture.

The Current Tax Benefit Tools – Section 80C

Section 80C of the Income Tax Act gives tax benefits in the form of reduction in the taxable income up to Rs.1, 00,000/- per year.

Of the investments in Section 80C, ULIPs and ELSS (Tax Saving Mutual Funds with 3 years lock-in)could be considered by investors with a long term (above 7 years and 3 years respectively)investment purpose. EPF is unavoidable for the salaried employee, so it becomes an automatic investment.

Term Insurance for the bread winner(s) of the family is a must for any family that gets the tax benefit. But very few families in India have one.

Children’ education is one other component that gets this benefit.

Other savings instruments like PPF, Postal deposits are better when not invested for tax purposes as the returns are very low for their long lock-in periods.

Principal component of the housing loan repayment is a positive inclusion in Section 80C. But when this component is included the space of Rs.1,00,000/- it becomes relatively small.

House Rent Allowance

Upto 40% (50% in case of the Metros) of the basic pay OR actual HRA received OR rent paid above 10% of basic pay which ever is LESSER is exempt from income as the House rent allowance.

Sometimes we see pay slips with HRA equal to 100% of the basic. There is not much benefit here. Please talk to your HR manager on whether you can have some flexibility to design your pay subject to the same CTC (Cost to Company).

Travel Allowance

This is an allowance that is still set at the archaic Rs.800 per month.

Leave Travel Allowance

There is flexibility now in the way LTA is to be processed. We do not have to submit the bills to the company to claim it. That looks like good news. However the hitch is that the IT department can ask for the original bills at their discretion.

This can be claimed only 2 times in a block of 4 years. Retain your bills. Ensure that what you claim is what you ‘actually’ spent.

Section 24 – Housing Loan Interest Component

There is a benefit of reduction in taxable income upto Rs.1,50,000/- per year for the interest component of the housing loan. Though there is a considerable reduction in the taxable income, it should be remembered that this cash flow is a negative cash flow that does not add to one’s wealth.

The way to look at it is, when we shell out Rs.150,000/- the maximum tax benefit that we get is probably 30% (at the highest tax slab).  This is Rs.45,000/- in the form of tax benefit.

If we had paid the tax instead, you may have lost Rs.45,000/- but will be able to invest/ use Rs.105,000/- the way you want to. By only thinking of saving the tax you actually lose out on paying as interest an additional Rs.105,000/-.

The other angle to this is that the interest component of the loan keeps decreasing as the years progress, thus negating the benefit of tax savings too in the latter years.

Creating Wealth Using Tax Breaks

Investments like the ELSS, long term investments in ULIPs (please do not take the sales agent’s view of investing for 3 years), pension plans like the EPF and New Pension Scheme give us the benefit of tax savings and also wealth creation.

Please do not borrow to invest in tax saving products unless it is an interest free loan from friends. The tax benefit may not be as high as the interest rate charged by the bank or your friendly neighborhood financier.

A house can be a wealth only when it is paid up in full. Technically it is an asset in the banks’ account till we pay out the last EMI. Please do not take up a housing loan for the apparent tax benefit that it gives; as it is highly negative in the wealth creation front. The HRA also becomes taxable if your house is in the same town as your office.

Make use of the tax breaks judiciously in the right spirit of investment and savings and not merely to avoid paying tax!

Does your tax planning give you a break or does it break you? is a post from: Indian Stock Market Tips

• ELSS mutual fund – An investor’s delight
• Still not Filed Tax ? Late for filing tax? Here’s help
• How to use Section 80C instruments smartly? An Overview about Section 80C
• Before investing in ELSS
• Should you invest in Tax Saving Mutual Funds?
• A Less Taxing Time is left now

Check the expense ratio, performance difference and track record of the scheme

Equity Linked Savings Schemes (ELSS) have features of a diversified equity portfolio. A detailed analysis of the same will help in better selection.

ELSS Mutual Fund

Investment in an ELSS helps get a tax benefit to a maximum limit of Rs 1 lakh under Section 80C of the Income Tax Act. Various other options like contribution to provident fund, contribution to public provident fund, insurance premium paid, etc also get tax benefit under Section 80C of the I-T Act. Investments made in ELSS are locked-in for a period of three years and each scheme has a different portfolio.

LOWER COST

Mutual fund investments have a cost attached to them because every scheme incurs some cost while managing your money. This cost is charged annually and eats into the returns on your investments. An equity-oriented scheme, attracts a fund management fee, also called as expense ratio. This cost is adjusted in the net asset value (NAV) of the scheme and not charged separately. Therefore, the investor does not realise that he is pays this amount to the asset management company. The expense ratio is a percentage of the scheme’s assets under management. For example, if a scheme returns 10 per cent and its expense ratio is 1 per cent, it means, the scheme earned 11 per cent of which 1 per cent went towards the various expenses.

According to the data from mutual rating agency, Value Research, 14 schemes had an expense ratio of 2.5 per cent and 19 others had a lower expense ratio. Of the top 10 ELSS schemes seven had a ratio lower than 2.5 per cent, while the remaining three had a ratio of 2.5 per cent, in the last one year ending January 27. This kind of lower cost is good for a long-term investor who stays invested in the scheme for several years.

OLDER SCHEMES

Many ELSS have been launched till now, but, since fund houses usually do not launch multiple schemes with similar features, the total number of ELSS is limited. And, the presence of a large number of schemes with a long performance record helps investors research enough for selecting the right scheme.

Thus, it is not surprising that most of the top performing schemes, even in the past one year, are those that have been in the market for several years. In the last one year, six ELSS have returned more than 100 per cent. Last ELSS scheme was launch in October 2005 and the first scheme came to the market in March 1993. Investors need to look at each ELSS portfolio.

Moreover, when time-tested schemes perform well, investors are more confident about putting their money.

LOW PERFORMANCE DIFFERENTIAL

If your scheme selection goes wrong, there are chances of witnessing a big difference in the return you receive as schemes differ in their performance from one another.This situation can be illustrated better when it involves the selection of a equity diversified scheme. In this case, a wrong choice can lead to a large difference in overall performance and hence the returns received by the investor.

However, this does not hold true for ELSS. As the variance is comparatively less in their case . In the last one year, the best performing scheme returned 127 per cent and the worst performer returned 63 per cent, as on January 27. In comparison, the difference between the worst and best performing equity divesified fund was a whopping 138 per cent

When compared over a period of two or three years, returns given by the best and the worst performing ELSS were 24 per cent and 22 per cent per annum, respectively.

This is less than half, when the best and the worst performing equity diversified schemes are compared. The difference stood at 57 per cent and 46 per cent per annum, respectively. The absolute difference will be far higher, as the figures are compounded over different time periods. This helps investors select a good ELSS scheme before investing.

Before investing in ELSS is a post from: Indian Stock Market Tips

• ELSS mutual fund – An investor’s delight
• Does your tax planning give you a break or does it break you?
• Credit Card Charges : Know more and be Safe from Debt
• What to do in Case of Banking Harassment – Recovery
• Top 5 options to save for a rainy day
• What documentation you need before apply Home Loan : Pre-requisites of Home Loan

If you buy a tax saving mutual fund – an ELSS scheme or something with “taxsaver” in it – you expect a tax deduction. But does it always apply for you?

ELSS mutual funds are especially deductible under Section 80C, which applies to everybody. It really means you get a Rs. 100,000 deduction from income (i.e. taxes are calculated after this deduction) – if you spend or invest this 100,000 in some specific areas:

• Public or Employee Provident Fund contributions
• The New Pension Scheme contributions
• National Savings Certificates, 5 year Bank or PostOffice Deposits, NABARD Bonds
• Insurance premium (Premium < 20% of sum assured)
• Mutual Funds (ELSS)
• School fees for two children (includes Pre-school fees, yay!)
• Principal repayment on a housing loan (or full/down payment on a house)

They all come clubbed in the same 100,000 deduction – meaning if any combination of the above goes above 100,000 – then that’s all you get. First, find out if you’ve already exceeded the 100K deductible. If you have, don’t bother reading ahead.

Do not buy ULIPs. They are evil.

If you still have anything left in that 100,000 tax deduction, you might think of ELSS mutual funds. Now you might be in for a surprise with the Direct Tax Code coming into force in 2011.

The DTC moves to an EET regime – Exempt on entry, Exempt on accumulation and Taxed at exit. ELSS is currently EEE – you save tax when you enter, and because of the STT benefit you pay no tax on exit. That will change – after 2011, any exit from an ELSS fund will be treated as “capital gains” and taxed in your tax bracket. If you buy an ELSS fund, the earliest you can exit is 2012-13, by which time the DTC will be active (and yes, it will apply to your old investments as well, unless they change the current draft)

The DTC even charges the withdrawal on the principal (not just the gain) – but it’s currently hazy about whether it will apply to past investments. Dhirendra Kumar at Value Research thinks that it will not apply to past investments and the draft code will be changed. Still, there’s a risk this works against you.

If you really need most of the money back in three years, buy a PPF/EPF instead – at least that has no tax on principal & interest till March 2011.

But the ELSS fund investment is a long term one and in all likelihood you can retain it for several years, only taking out what you might need. Even with tax, the gains from equity may be substantial, and high enough to outperform the PPF/EPF rates (the NPS has done 14 and 11% in the last two years; most ELSS schemes are just about where they were two years back)

With the higher mutual fund commissions too, their future returns are suspect. But I’d say this – it’s probably a better bet to go with a good tax saving fund and keep the money in there till you retire. It’s a good long term saving system with enough liquidity that you can take it out anytime after three years, but won’t because it’ll get taxed. And if you don’t need the money, then please use the NPS – the ultra low management fees juice up the returns substantially.

Source : Value Notes

Should you invest in Tax Saving Mutual Funds? is a post from: Indian Stock Market Tips

• Does your tax planning give you a break or does it break you?
• ELSS or SIP: Which route is best for your investments?
• ELSS mutual fund – An investor’s delight
• Dividend declaration under HDFC TaxSaver
• Still not Filed Tax ? Late for filing tax? Here’s help
• How to use Section 80C instruments smartly? An Overview about Section 80C