Many investors looking to invest in mutual funds are quick to take the ELSS or ELSS via SIP route. Reason: ease of use and, most importantly, tax benefit. Investors often confuse SIP with ELSS. While ELSS or Equity-Linked Saving Scheme is a type of mutual fund that is eligible for tax exemption under Section 80C of the Income Tax (I-T) Act, SIP or Systematic Investment Plan is only a way of investing in a mutual fund. Simply put, the option of SIP enables an investor to schedule parking of a fixed amount of money in an instrument on regular intervals. For example, Rs 1,000 every month. But how should you select a mutual fund, or invest in it? What are the factors you should keep in mind while investing a mutual fund? NDTV.com here gives you a lowdown on everything you should know about mutual funds:
How to select a mutual fund
Before you rush your money into a mutual fund, financial planners advise considering a few important points. Explained below are some of those:
Many experts emphasise that a potential mutual fund investor should be clear of his or her financial goals. Ask yourself: What is it that you want to achieve? Is it high returns over a time period of 10 years, or a wedding about three years away?
Mutual funds are broadly categorized according to three types of investors: aggressive, moderate and conservative. Again, the mutual fund should fit an investor's comfort level, say financial planners. For instance, an aggressive fund may comprise stocks with higher - thus riskier - growth estimates.
"Investors should keep in mind their financial goals and risk appetite. Once that is done, then they should look for funds which are in sync with their goals," said Amit Kachroo, managing partner, AANEEV Wealth. It's important to learn about the nature of a mutual fund, whether it's a large cap, midcap or largecap, he points out.
Expense ratio (TER) determines how much money will be deducted from the net asset value of a mutual fund towards towards management of the fund.
Information on a desired mutual fund is public and can be found on the website of the mutual fund institution as well as that of the AMFI (Association of Mutual Funds of India).
Besides, the reputation of the fund manager, fund size and turnover ratio are some of the other aspects to look at.
"It is pretty important to check who the fund manager is. Study the fund manager's style of stock picking and check the performance of other funds which he is managing. Also an important point to note is fund managers' tenure: how long he has been associated with the fund house," said Mr Kachroo.
When to invest in mutual funds through ELSS
ELSS qualifies for tax deduction up to Rs 1.5 lakh in a year under Section 80C of the I-T Act. Investment in an ELSS mutual fund comes with a lock-in period of three years. An investor who wants to save tax under Section 80C should invest in an ELSS. However, from 2018-19, ELSS returns - after the lock-in period of three years - have lost their tax-free status. Returns above Rs 1 lakh are taxed at 10 per cent under the latest long-term capital gains tax rules. "These new policy changes have raised a lot of valid questions and the attractiveness of ELSS instrument purely for capital gains purposes has come under a shadow," Rahul Agarwal, director, Wealth Discovery, told NDTV.
"In spite of these changes, ELSS investments do have certain benefits that direct mutual fund investments do not have. ELSS is the only equity-oriented mutual fund scheme that provides 80C benefits. In addition, ELSS continues to have the shortest lock-in period among various tax-saving investment options available under the Section 80C basket," he said.
Returns from any mutual fund are taxed in either of the following two ways: Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG). While STCG is applicable in case of a holding period of less than one year, LTCG is for a holding period of more than one year. LTCG in excess of Rs 1 lakh is taxed at the rate of 10 per cent without the benefit of indexation. STCG is taxed at 15 per cent.
Mr Agarwal explains the income tax savings for an individual with a gross annual income of Rs 9 lakh via an ELSS, using the following table:
|Parameters||Tax after Investing in ELSS|
under Section 80C
|Without Investing in Tax Saving|
Investments under Section 80C
|Gross Total Income of the person||Rs 9,00,000||Rs 9,00,000|
|Tax Exemptions under section 80C||Rs 1,50,000||0|
|Total Income||Rs 7,50,000||Rs 9,00,000|
|Tax on Total Income||Rs 51,500||Rs 95,275|
|Amount of Tax Saved||Rs 43,775||0|
|Note: Assumed no other deduction from gross income. Tax is calculated including applicable cess.|
The example is based on assumption of no other deduction from gross income and tax is calculated including applicable cess.
So while investing in a mutual fund via ELSS or ELSS through SIP, you should go through all the aspects of these routes and only then invest your money.