Anil Ghelani, CFA, Head - Passive Investments and Products at DSP Mutual Fund

26 Mar 2024 , 03:17 PM

What is your outlook on markets and what strategy should retail investors use in the current scenario?

While the Nifty 50 Index is touching new highs, the corporate earnings have also grown well from the previous peak of markets seen in October 2021. We have seen Nifty 50 earnings per share of October 2021 grow at a healthy 40%. Today with markets reaching new highs, we do not know if this could be high, or in hindsight this could be a good entry point for long term wealth creation. But keeping in mind a prudent approach in a sharply rising market, my personal strategy is to go with SIPs instead of lump sum which you can also consider after discussing with your trusted financial advisor based on your risk appetite and return expectations.

In today’s dynamic world, how have ELSS investments evolved?

Often tax saving can be a good tool to get started, and ELSS has helped investors to get started with the habit of making long term investments. One area which I have seen evolve over the years is that instead of a last minute rush and investing in lump sum in March, many investors have started using SIP mode. We have seen a unique solution which works great if you are a salaried employee. Most Fund Houses offer a facility whereby directly from our salary, each month an amount of ₹12,500 (or ₹1.50 Lakh for the year) gets automatically channelized by your company payroll processing team into the mutual fund scheme. This facility is commonly known as SDP (Systematic Deduction through Payroll). Since such amounts do not come into my bank account at all, there is no visibility of the same and hence no potential to use up the amounts. This ensures two basic principles of personal finance: ensuring a disciplined approach of investing systematically each month; and making investments at different entry points without thinking about market timing or short term volatility. In parallel, slowly and steadily, these invisible amounts get accumulated towards creating our wealth each month, while ensuring we reduce our tax outgoings.

How to choose ELSS funds for different risk profiles?

When you invest in ELSS Funds, since the underlying investment is in equities, it offers potential returns which are often higher than some of the other debt oriented tax saving tools, but this comes with a relatively higher risk associated with fluctuations in equity markets. The starting point for any investment, for tax saving or otherwise, has to always be the risk profile, time horizon and the risk and return expectations. Hence, it is important to choose only if the lock in of minimum three years and the relatively higher risk with higher return potential is aligned.

How does ELSS contribute to maximizing tax benefits through Section 80C deductions?

There are various good tax saving investment avenues available to get a tax deduction upto ₹1.5 Lakh, where most have a lock in period of at least 5 years and offer a debt or fixed income type returns profile. In my view, ELSS Funds can offer a huge benefit mainly for these two areas. When you invest in ELSS Funds, the lock in period of 3 years is relatively shorter. Unlike some other products, there is no mandatory redemption after this period of 3 years and if you are comfortable to hold the investments, you can continue to remain invested for the potential benefit from the power of compounding over longer periods. Since the underlying investment is in equities it offers potential returns which are often higher than some of the other debt oriented tax saving tools.

What is the average performance of ELSS funds against benchmark in 3 and 5-year horizon?

We have seen typically that over 3 and 5 year periods, most of the ELSS Funds have been able to outperform the benchmark indices. Further, since there is a lock-in for these funds, it acts as a better discipline for investors to remain invested for longer period.

It was said that ELSS will lose its edge under the new tax regime. Has that panned out?

Till now we have not observed any major changes in investor behavior or any marked change in investment flows into ELSS Funds for the industry as a whole. We at DSP have retained our consistent efforts for investor awareness on this front with our annual campaign of ‘BACHAO’ to enhance awareness about tax saving features since the past many years.  If we take a step behind, even before the new tax regime came in place few years ago, there have always been a lot of other allocations such as different investment products, home loan related payments, mandatory EPFO contributions, life insurance premium, etc., but despite all of these, ELSS has remained an important allocation. However, there is one additional change in new tax regime this year – while it still remains optional, the new regime will be set as “Default” so there could a slightly higher resistance to change. So we do need to wait and watch if this results in any structural change in the future.

Some of the AMCs are providing loans against tax-saver ELSS funds. More about this.

During the mandatory lock in period of 3 years, there would be no loans possible because an effective pledge cannot be created on ELSS Funds. However, post the completion of the lock in, then such investments become like any other mutual fund holdings and most lending institutions would provide loans against such investments. Further as per my understanding, such facilities might be offered by affiliates of the AMC or their group companies, since the AMCs are not allowed to do lending business or provide any loans to investors.