Why ELSS can be your best bet

The year 2009 may have been one of the best years for equity investments, but it was definitely not the last year to witness such a performance. History has shown that after every major dip, the Indian equity markets have reached even greater heights.

Investing in equity is a long-term approach and one should not invest with the intention of making a quick buck. India is one of the fastest growing economies in the world, with structural benefits of demographics, growing consumption and higher infrastructure investment. Thus, the future of the economy continues to look bright and will be reflected in the performance of the stock markets in the years to come.

ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the tax deduction, the investor also gets the potential upside of investing in the equity markets. The icing on the cake is that no tax is levied on the longterm capital gains from these funds.

Except for the tax deduction and the three-year lock-in period, there is not much difference between an ELSS fund and a diversified equity fund. The only advantage that a fund manager of an ELSS fund has is that he can take a long-term view on the market or a stock and invest accordingly. That is the approach we have adopted for Magnum Taxgain, where we have invested in a number of stocks with long-term potential.

The most important determining factor for the investor is the long-term track record of the fund. As the investment is locked-in for three years, it is extremely important to check for consistency in performance. It is also important to understand that equity investments cannot offer assured returns. An ELSS fund carries the same risk as any equity fund. However, in a growing market like India, if one invests with a long-term horizon, the risk-reward ratio is more favourable for equities.

Be it ELSS or other equity funds, systematic investment plans (SIPs) are the best way to invest in the markets. Theoretically, one must invest when the markets are down and valuations low, but practically most investors follow the opposite trend—they think bearish when the markets are down and bullish when the markets are up. Given that timing the market is very difficult, SIPs offer the best way to invest in the market. They average out your cost of investment and infuse a disciplined approach to investment.

The draft Direct Taxes Code proposes to do away with tax exemptions. Considering that there is a need to channelise savings into equities in a growing economy like India, it is difficult to think that the tax exemption for investment in ELSS funds might be withdrawn.

Jayesh Shroff is Fund Manager, SBI Magnum Taxgain