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For many, tax-saving ELSS funds are the gateway to mutual funds

LiveMint logoLiveMint 17-05-2017 Srikanth Meenakshi

I am 38 years old and I want to save Rs30,000 tax for next financial year. Can you please let me know how much money I would need to save per month to achieve it? I want to start a systematic investment plan (SIP) in any tax-saving mutual fund. I have a portfolio of Rs22,000 per month in SIPs but that is all in equity funds. I have never invested in tax-saving mutual funds.

—Vishal Kharbanda

Considering that your SIP investment every month is Rs22,000, I am going to guess that your taxable annual income is upwards of Rs10 lakh. That would put you in the 30% marginal tax bracket. In that situation, for you to save Rs30,000 in taxes, you would need to invest Rs1 lakh in one or more equity-linked saving scheme (ELSS) funds. In a way, it is a bit surprising that you have not invested in ELSS funds until now. For many investors, ELSS funds, with the lure of tax deduction, are the gateway investments into mutual funds. After they see the returns from these instruments, where they merely invested to take advantage of the tax benefit, they start investing in SIPs and build a mutual fund portfolio. In your case, it appears that you bought into the concept of equity investing and SIPs before you realised the tax saving potential in a different kind of mutual fund. Please note, that ELSS funds are unlike other equity mutual funds in one important aspect. Investments into these funds are locked for 3 years, starting from the date of investment. If you do an SIP in such a fund, then every instalment of the SIP will be locked for 3 years starting the day of the instalment. To make your investments, I suggest you do an SIP for 10 months (given that we are already 2 months into the financial year) for Rs10,000 each month. You can choose two funds: ICICI Prudential Long term equity plan and Invesco India Tax plan, and split the monthly instalment evenly between the two.

I had invested in UTI Wealth Builder Scheme about 10 years ago, which has tripled in value. Should I move out now or stay longer?

—Athuo Phimu

UTI Wealth Builder scheme is a multi-asset fund that invests in all the major investment asset classes: equity, debt and gold. You must have invested in this fund during its new fund offer (NFO) in November 2008. Since then, the value of the fund has indeed tripled. However, such an increase in value of the fund only means that the fund returned a little more than 13% a year compounded. Considering the hybrid nature of this fund, this is indeed a handsome return and since this fund is equity oriented, all the returns would be considered long-term gains and exempt from taxation.

Having said that, during this period, there have been other funds, even in the UTI fund house, that have given higher returns. If you had known that you would stay put for more than 10 years, you could have invested in funds such as UTI Opportunities or UTI Equity, which would have yielded more than 16% compound annual growth rate (CAGR), and your money would have quadrupled in this period.

So, to answer your question about what to do now, it depends on how much longer you plan to stay invested. If you don’t need this money for another 5 years or more, you can move to one of the other UTI funds from your current mutual fund. If you need to redeem your investment sooner, you are better off staying put in this scheme.

I am new to investing and was going through Value Research and other websites to know how different mutual funds are faring. Most funds have compared themselves with a benchmark index. Why do different funds have different benchmark indices to compare with? Is it the right way to judge a scheme? What other parameters should I look for?

—Shantanu Prasad

The purpose of having a benchmark for a fund is to be able to compare returns between a passive investment instrument (index) and an actively managed fund and thus determine the value that the fund manager is delivering to an investor. Different funds belong to different categories depending on where they choose to invest their investors’ money.

Depending on the category that they belong to, they choose a benchmark index that is appropriate. For example, a large-cap fund that invests in the largest companies in the market would benchmark itself against the BSE Sensex index or the Nifty 50 index, which are indices that contain the large companies in the market. Choosing any other benchmark index would be an inappropriate comparison.

Comparing the performance of a fund with the benchmark performance is a fair way to judge the scheme and the value that it is delivering. Along with that, it would also be useful to compare the performance of the scheme with its peers—that is, other schemes that belong to the same category, and see how it stacks up.

Srikanth Meenakshi is co-founder and COO,

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