Investments in an ELSS should be done in a disciplined, systematic manner throughout the year. Unfortunately, most of us still wait for the March deadline before rushing in to make our tax investments. Such an eleventhhour approach will compromise the potential for generating impressive returns, especially considering the current state of the equity markets.
The stock market has witnessed one of the most volatile years in the recent past and many of the large-cap stocks are currently available at a 50-70% discount. This, combined with the fact that ELSSes have a threeyear lock-in period, make them an attractive option today. The lockin period can work to your advantage as the fund manager can deploy a larger portion of the portfolio in equities, which have the potential to perform better over the long term. He does not need to hold large amounts of cash to service redemptions.
Equity funds may seem volatile in the short run, but they beat inflation in the long run. Therefore, ELSS is an ideal option for tax savings and wealth creation. Also, ELSSes have the lowest lock-in period when compared with other instruments like PPF (15 years) and NSCs (six years).
The market has punished both the good and bad stocks indiscriminately, but as India emerges from the turmoil, the fundamental strength of its domestic consumption will be recognised and we could see equity benefiting from the current base effect. In this context, what makes ELSS investments most attractive is the ability of an investor to put money in the equity markets at a discount. For instance, if your annual taxable income is Rs 5 lakh (which makes you liable to pay 20% income tax), you can, in effect, buy the Sensex at a price that is 20% below its current 10,000 levels, that is, at 8000 levels.
The market today is threatening to dip further, but rock-bottom valuations of good quality companies mean that it is unlikely to fall dramatically. More importantly, there is scope for a big upside from current levels. If you invest in an ELSS now, there is a good chance you are getting in near the bottom, and therefore, stand to reap strong returns over a threeto five-year period.
Make your ELSS investments with a process-driven fund house compared with a 'star fund manager'-driven one because individuals may be fallible, but processes have a better chance of success. Do check with your financial adviser before choosing equity over other tax-saving options.
Krishnamurthy Vijayan is CEO, JP Morgan Mutual Fund
