FINANCE TAX SAVING SPECIAL...... ELSS is not the only tax-saving option

FINANCE TAX SAVING SPECIAL ELSS is not the only tax-saving option   Most investors need both ELSS and provident fund for effective   tax planning. We are into the new tax-planning season and some mu tual fund distributors  have begun pushing equity linked savings schemes (ELSS). Their sales pitch:  ELSS has beaten the Public Provident Fund (PPF) handsomely in the past 15 years; PPF investors have lost heavily by not investing in ELSS. But, showcasing only the latest situation isn't being fair to the investor. Though ELSS has given better returns compared with the PPF in the last 15 years, this hasn't always been the case. Our analysis is based on the assumption that `10,000 was invested at the end of December, every year starting 1985, for 15-year periods (1985­2000, 1986­2001, 1987-2002 and  so on)  in the PPF as well as in the Sensex. Since there was no ELSS scheme available in the eighties, BSE Sensex has been used for doing  the analysis. Dividend yield on the Sensex has been ignored because retail investors can't invest in the Sensex directly--they have to invest via index funds. So the expense ratio of index funds will nullify this small dividend yield. As is visible from the chart, the Sensex was able to beat the PPF in 12 of the 16 rolling holding periods--75% of the times--while it underperformed the PPF across four 15-year periods. It is not a clean sweep. Investors need to carefully consider both PPF and ELSS for their financial planning. Personal finance Each individual needs to consider what suits her best. “This decision has to be taken at the personal level and that is why it is called personal finance,“ says Tanwir Alam, Founder and CEO, Fincart. “ELSS is a good option for investors who understand the equity market and can withstand its volatility. PPF is a good option for those who don't want to take the risk even in the long term,“ says Vikram Dalal, Managing Director, Synergee Capital Services. Asset allocation No financial planner will advise you to put your entire corpus into equities, just because the holding period is long. Similarly, you should also not avoid equities and go overboard on debt. The most important thing is to take into account the employee provident fund (EPF), available to all salaried employees, when calculating one's asset allocation. “For salaried employees, a good part of the debt might already be covered by the EPF,“ says Alam. The co-relation between debt and equity market is low and, therefore, a balanced portfolio reduces the risk significantly. Though the exact asset allocation should be based on your risk-taking ability, a standard asset allocation can be drawn based on one's age.  “Out of the `1.5 lakh available under Sec 80C, youngsters should invest around `50,000 in EPF or PPF and the balance should be put  into ELSS. For investors close to 50, the ratio should be reversed,“ says Ankur Kapur, Founder and MD, AK Advisory. Avoid last minute rush While product pushers love the fag end of the financial year, you needn't wait for the `tax-planning' season for your financial planning.  If you do so, you may end up investing in the wrong products. “Be it in ELSS or PPF, or a combination of both, investors should start investing from April onwards. Opt for SIPs in case of ELSS funds and regular monthly investment in case of PPF,“ says Kapur.  By taking the SIP route to investing in ELSS, investors also get the benefit of averaging out their costs. Sec 80C already exhausted? Sec 80C offers limited tax benefits. It could get exhausted by things like repayment of the housing loan, premium on insurance policies, tuition fees of children, etc. This doesn't mean investors should avoid long-term products including ELSS and PPF. “`1.5 lakh should be treated as savings for social security. Instead of treating it as an additional job imposed by the HR, investors should treat it as retirement planning,“ says Kapur. Of course, investors who exhaust their Sec 80 C limit, have the option of avoiding ELSS and investing in other equity funds. Moderate expectations Investors need to note that the government may cut the PPF rates soon, so the future returns may be much lower than what was achieved in the  past. Similarly, with the Indian market stabilising, the returns from equity will also come down. The growth of the Sensex from December 1979--119 points--and December 2015--26,118 points— works out to be a compound annual growth rate (CAGR) of 16.16%. However, most of these gains happened in the initial years. If you split these 36 years into two time periods of 18 years each, the CAGR of the first 18 years--till 1997--was 20.98%;  for the next 18 years, it is just 11.54%. So, those investing in ELSS funds should also moderate their return expectations.

NARENDRA NATHAN

ET1FEB16