Investments in ELSS
Many of us may make some investments in ELSS (Equity Linked Saving Scheme) for saving tax this year. ELSS is a good investment, but do you have any idea how much amount that one need to invest to get the maximum advantage?
First of all, we need to decide whether to invest the maximum amount to avail the full tax benefits for the year. Many people just do that for the sake of saving some tax amount and they forget about the risks associated with the equity-exposed investments such as Unit linked insurance plans (ULIP) and Equity linked saving schemes (ELSS). Yes, every investor should have sufficient amount of money exposed to few good performing equity linked investments to gain decent profit but that does not mean that we should invest all savings in equity products.
As a thumb rule, it is not advisable to expose the whole savings to equity exposed investments. One need to keep a portion of it to meet future contingencies due to untoward incidents or any medical issues for self and family members. The amount one need to keep aside to meet these contingency risk factors may vary depending upon that individuals socioeconomic status. Your entire family may be covered under life insurance and health insurance but you still need to keep this contingency fund aside just to be on safer side.
Investments, Investible surplus and expenses calculation
Invest only a part of investible surplus and not all your savings. Investible surplus is the amount that you have after all your regular expenses – that include your family and personal expenses – are met. It is about deducting your 3-4 months average expenditures plus around 10% of annual savings. Let us make it clear with a simple example.
Consider your total annual savings are 400000 INR and your average monthly expenditures and contingency expenses are about 30000 rupees and 45000 rupees respectively.
Then your investible surplus would be around: 235000-265000 INR
If you know your regular investments, then it is easy to calculate your investible surplus by using the method mentioned above. This is an amount that we can ideally invest. However, it is still not advisable to go ahead and invest the whole money in ELSS or any other equity linked investments. Many people cannot afford to do so because products like ELSS or ULIP cannot be liquidated in first few years of its inception and it is subject to high market risk.
In such situation, how to go about it? Just ask yourself, can you take that much risk? Many people cannot take such risk with their hard-earned money, especially if they are above 40 years and having too many financial commitments to self and family.
In such cases people would prefer investments in low risk asset classes even though such investment plans earns comparatively less return than high risk equity investments. The ideal solution would be to spread the whole investments into different asset classes. This way we can share the risk associated with the investments in equity products.
Managing Portfolio of Investments
Now, the question is how much percentage of your investments that we should expose to equity market every year?
There is a general thumb rule that shows the maximum percentage of investible surplus amount that one has to expose to equity products at any point of time in a year. There is no hard and fast rule that you should stick exactly to that rule but, ideally keep somewhere close to that. When you follow this rule, you will get better control on your portfolio and investment pattern. This will help you know where do you stand on the way to achieve your investment goal. This figure is calculated based on the age of an individual, so it is an approximate figure but the most ideal equity exposure of an individual can only be arrived through proper personal financial planning process with the help of a certified financial planner.
So What is this thumb rule for investments?
Minus your age from 100 and takes that much percentage of your investible surplus (Not full savings) of that year as the amount that we can invest in any tax saving equity-linked investment plan for that year.
Let us make it clear with the same example mentioned earlier. Here, our investible surplus amount is 235000 to 265000 INR. Let us assume your age is 30. That means you can expose up to 70% (100-30) of your investible surplus to any equity linked investments this year.
Now, if we take 70% of 235000 or 265000 INR (We can choose either one of these figure depending on our personal preferences and risk appetite) we get the actual amount that we can ideally invest in this year. It comes to Rs.164500 to 185500.
Remember, this amount is subjected to change every year as you get older. This ratio varry based on investible surplus amount that we would have in the coming years. We need to adjust this level in each year and maintain the ratio between equity based investments to the other investment components. Maintain the percentage based on the age, overall portfolio value and the amount that you want to invest in each year.
We understand how much money that we need to invest in equity market every year. Now, you may want to know how long one should invest in these equity linked instruments? Every ELSS has a minimum locking period of 3 years. Investors are free to exit this fund if they are happy with the return they earned after this locking period. In case the investors want to gain more return then they can wait for few more months or years for the fund to appreciate.
Which are the top ELSS funds that we should prefer?
Almost all Asset Management Companies in India has an ELSS scheme. Investors need to go through the fact sheets of each mutual fund and analyze the previous years performances. Investors can make a decision based on this analysis. Here are three ELSS funds that performed well in the past years:
1. Franklin Templeton: Franklin Templeton Tax Shield
This is an open end equity linked savings scheme (ELSS) with an allocation of minimum 80% to equities to enable growth over the long term. Since this fund invest mostly in large cap blue chip companies, the investment made in this fund is subject to less volatile than mid cap funds. I suggest this fund in all market scenarios due less risky nature compared to its peers.
2. SBI MF : SBI Magnum Taxgain Scheme
This is a very old fund but it has consistently performed at regular intervals in the past. You might not see this fund holding the top performer’s slot quite often but it will definitely give a decent return over 4-5 years of term.
3. TATA MF: TATA Tax Saving Fund
This fund is managed by the Fund manger, Pradeep Gokhale. One can invest Rs.500 or multiples of 500 in this scheme. This fund invest 80% to 100% in Equity & related instruments. The remaining part of this fund is allocated to listed and unlisted debt instruments. Since this fund is highly exposed to equity market, it is classified under high risk investment. This is a top ranking fund and performed consistently in the past.
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