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Invest now at 13,000 Sensex levels
Disclosure: The subject line of this note does not say anything which is not true.
It definitely sounds too good to be true. The BSE Sensex is presently well over the 19,300 mark! Well, believe us; we haven't got our facts wrong.
Well, before you write off the above assertion, do spare a couple of minutes so that we can explain how you can invest
To be honest, the answer to this question is no secret. And it's very simple. Some smart investors have known this for a long time. Now you too can make the most of this.
You are aware that you can invest upto Rs 100,000 in designated schemes to save tax (under Section 80C). One eligible avenue under this option is tax-saving mutual funds (also know as ELSS).
So, what are tax-saving mutual funds or ELSS?
ELSS schemes are a lot like the regular equity mutual funds, but with three key differences.
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One, ELSS schemes have a mandatory lock-in of 3-Yrs. This lock-in cannot be revoked prior to 3-Yrs unless the investor meets with an eventuality. Open-ended equity schemes have no such lock-ins.
Two, ELSS schemes have to remain invested to the extent of 80% in equities and select other approved securities at all times. The corresponding limit in other equity funds is set by the funds themselves (though this limit is always at or above 65%).
Three, investment in an ELSS scheme is eligible for tax deduction benefits u/s 80C. An investment in other equity funds does not trigger any such benefit. However, like other equity mutual funds, ELSS schemes too benefit from zero long-term capital gains tax; also dividend received from these schemes is tax-free.
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| ELSS in a nut-shell |
| Your money is locked for 3-years |
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| ELSS are required to invest upto 80% in equities |
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| The sweetner - there is a tax deduction available upto an investment of Rs 100,000. Dividends are tax-free too! |
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Tax deduction - The best cash-back offer you can get!
Let's understand this concept of tax-deduction in the context of ELSS for therein lies the answer to your question -
How can one invest at 13,000 levels, when the stock market Index is currently at over 18,000 points?
Tax-deduction is the tax-benefit you derive by virtue of having made an investment in a specified scheme like ELSS. How this works is that subject to an overall limit of Rs 100,000, all the money you invest in ELSS and other specified schemes, you derive a tax benefit that is equivalent to the tax that you would have otherwise paid on that amount.
So, if you are in the highest income tax bracket, then the Rs 100,000 investment will save you Rs 33,990! Isn't that the best cash-back offer you ever heard of!
In effect, you get a "discount" when you make an investment. Correlate this saving to an investment in the stock markets, and you know how you can invest in the Sensex today at a level of 13,000!
If you put in money today at a Sensex level of 19,300, adjusted for the tax benefit that you get, the investment is effectively at a level of 13,000!
Glance at this table below to understand the benefit you will derive by investing in ELSS -
Income Tax
Bracket | Amount
Invested (Rs) | Savings
U/s 80C (Rs) | Effective Investment,
Adj. for Tax Benefit (Rs) | Equivalent
Sensex Level |
| 10.30% | 100,000 | 10,300 | 89,700 | 17,369 |
| 20.60% | 100,000 | 20,600 | 79,400 | 15,374 |
| 30.90% | 100,000 | 30,900 | 69,100 | 13,380 |
| 33.99% | 100,000 | 33,990 | 66,010 | 12,782 |
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Current Sensex Level: 19,363 (Nov 30, 2007), Please Note: The actual tax benefit will depend on various factors. Please consult your Chartered Accountant for the same
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So if you have been holding back your investments in the stock markets, hoping for a correction, then here is an opportunity that you can benefit from!
Like the idea of saving tax smartly? But here's an
honest advise. Don't rush in.
The fact that you have an opportunity to invest in the stock markets at effectively attractive levels is undeniable. However, there are a few things that you must consider before putting your money in to ELSS schemes -
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One, do you have scope to invest money u/s 80C or is your Rs 100,000 limit already exhausted?
Two, if you can invest in ELSS then, do you have the risk appetite to invest in what is effectively an equity scheme? Investments in the stock markets can be very volatile and there is a chance that you may actually lose your capital.
Three, given that you have the appetite, do you have access to an honest financial planner who can guide you in selecting the ELSS that suits you best? Indeed, if you put in money in a poorly-managed scheme, then forget the tax benefit, you may actually stand to lose your capital.
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| Points you must consider before investing in ELSS |
| Have you exhausted your tax limit? |
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| ELSS can be risky. Do you have the risk appetite? |
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| Are you getting the right advice. Rather, are you getting honest advice? |
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Personalfn can help you save tax. Smartly.
If you are looking for honest recommendations on what you should do with your tax-saving money, then Personalfn is the solution for you! Backed by our solid, process-driven research initiative, we are equipped to guide you on how you should go about investing to save tax. We will guide you on the asset allocation that suits you best; and we will also tell you which tax-saving funds are best for you. And of course we will provide you all this guidance at a time and venue that suits you best!
If you still need more reasons to meet us, please click here to know more about our services. We look forward to having you as our client!
If however, you already have an existing relationship manager, and wish to check his recommendations with ours, you can subscribe to our fee-based service - FundSelect Plus.
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