ELSS: FAQs
Even though this is not the tax season, I do get a lot of questions related to ELSS.
Let me enumerate them:
1. Should I invest in ELSS?
2. Is there a lock in? When does the lock in start and when does it end?
3. What rate of interest will I get (yes, still this question keeps coming!)
4. Should I take the dividend option?
and a million others. Surely there are enough people who can answer these questions ( I presume industry experts will do so happily, and they can get a MF to sponsor the replies too!).
However 2 questions where my answer is different are:
1. Should I invest in an ELSS to save tax?
Answer: Yes.
2. If the lock-in is over should I remove the money?
Industry answer: No, of course not. Let it remain in the same fund, and it will do well.
My answer: Yes, remove the money as soon as the lock in is over. As no new investments are expected to come into such schemes (post DTC implementation, I presume) the AUM in these schemes will keep falling. When the aum falls the asset management charges will go up – and go up steeply. This is because most ELSS schemes do not have too much money (SBI of course is an exception).
So if you have moneys lying in ELSS past the 3 year lock in period, just pull the plug. Then reinvest in a good mutual fund or direct equity – as per your style preference.
My view? choose Hdfc Equity, Hdfc Prudence, Templeton India Equity Income fun, Franklin India Bluechip, Prudential Icici Discovery…..
ps: want my Broker’s code number? L O L
Muthu
I’ve a different way of looking at the question number 2, if you don’t label me as ‘industry’.
With DTC kicking in and ELSS going away, these would become one of the multi-cap funds from the AMCs staple.
Instead of closed ended ELSS, it would be simple open ended diversified equity fund.
Some of these funds have been doing very well. With they becoming open ended, as the performance being good, they are very well capable of attracting new inflows.
Before concluding what to do with ELSS, I think we’ve to see how the respective fund houses are going to reposition this product or would they be merged with their any other good performing scheme etc.
I think we can wait till April’12 to know the answer. And there is also a remote possibility of government listening to the industry’s request to continue with tax benefits of ELSS scheme! In India, it is better to act based on the act than on the draft. I doubt whether even the FM know as of today what all in draft would become part of the act!
Falgun
Hi Subra…..Are there any exit charges for same?
Shiva
Hi Subra,
What if we enter now, for saving tax this year?
My investment would be locked for 3 years and wouldn’t my gains(tax saving+equity if any) be lost since these schemes would loose their sheen? Shall I prefer not investing in ELSS starting this year to avoid any losses after April 2012.
Please suggest!
Anand
There is no exit charge, since you are already in the fund for 3 years. No need to pay tax also on the profit.
subra
they will not loose their sheen overnight…but yes, the direction is right. The only investment in equity with a 3 year lockin is still elss, nothing else 🙂
Arun Sharma
Hello Subra
From yesterday only,I started following your blog after your article through jagoinvestor newsletter “What is the worst advice that you have ever received?”
Although i have read article on various financial magazines but also thankful Mr. Manish as well as i now get opportunity to follow your blog as well.
Thanks for posting such a informative articles on personal finance.
Regards
Arun Sharma
Sanjay
Subra sir, I need a advice. One of my friend has adviced to always go for dividend option in ELSS. His argument is tax lasw dictate that ELSS should have atleast 80 or 90% in equity. So if market is overheated, then ELSS MF manager cannot do but stay put. If we opt for dividend option then he can delcare dividend in case of overheated market. Would you like to suggest the same?
subra
completely agree..also if u opt for the dividend reinvestment..that div also gets locked in. also the div can be reused for 80c…anyway all this is history..once dtc comes..