ELSS & SIP – A Perfect Match Made in Mutual Funds
One option which gives you twin benefits of tax savings and capital gains. Another option which helps you take advantage of fluctuations in the stock market and averages your cost of investment. What more does one need?
Earlier, an investor had to spread their investments across different instruments like PPF, NSC, ELSS and Infrastructure bonds to save tax. Now, it is possible to invest the entire limit of Rs 1, 00,000 under Section 80 C (2) in ELSS or Equity Linked Savings Schemes and deduct the investment from their total income to save tax. ELSS schemes have a three-year lock-in period, which works to the investors’ benefit as the fund manager can invest with a longer perspective in mind and have a portfolio of stocks that can out-perform over a period of time.
Why should one invest in ELSS?
1. Benefit of tax: As per the Union Budget 2007, under Section 80 C(2) one can now take the tax benefit by investing upto Rs.1,00,000 in one instrument only, which means one can invest only in ELSS and attain tax benefit on the same amount.
2. Lower lock-in period: The lock-in-period in the case of ELSS is 3 years which is lower than other tax saving options. Due to this lock-in-period it provides the fund manager with greater freedom to take a medium to long-term view on certain stocks. The lock-in-period of 3 years also helps investors become more disciplined and facilitates them to realize true potential of their investments
3. Potential for capital appreciation: ELSS provides investors with an opportunity to access market linked returns as majority of ELSS portfolios invest in equities, and historically equities have delivered better returns than “guaranteed return” options.
4. Tax Free Returns: ELSS deliver far better post tax returns as dividends and capital gains from investments are exempt from tax and have rewarded their investors well in the form of steady returns and consistent dividends paid out.
Comparison with conventional tax saving options available under Section 80 C(2):
|
Options
|
Lock in Period
|
Returns (p.a.)
|
|
ELSS (Market Linked returns)
|
3 years
|
36.80%
|
|
PPF (guaranteed returns)
|
15 years
|
8.5 % compounded
|
|
NSC (guaranteed returns)
|
6 years
|
8 % compounded half yearly
|
|
Bank Fixed Deposits (guaranteed returns)
|
5 years
|
8.5 % **
|
Note: Average Market Linked compounded annualized returns for 3 year period ending 31-January-2008 for the ELSS category ** Rate for a 5 year fixed deposit
A Systematic Route to Tax Savings
One of the best rules of investing is to save and invest on a regular basis. SIP or Systematic Investment Planning provides the investor the best combination of investments available to investors. The minimum investment in an ELSS through the SIP route is as low as Rs 500.
SIP helps an investor take advantage of the fluctuations in the stock markets by rupee cost averaging. Rupee cost averaging can be explained with the help of the following example. If Rs 1,000 is invested a month at a price of Rs 20 a unit, the investor will have bought 50 units (1,000/20). But at a price of Rs 10 per unit, he will have bought 100 units (1000/10). Investing a fixed sum regularly means averaging out the cost, as the investor gets fewer units when the price goes up and more when the price goes down. An SIP ensures that an investor buys more when the markets are falling and less when it is rising. But if an investor backs out when the markets are falling, he will not be buying and this will not allow him to average his costs, the primary reason behind the success of investing through the SIP route.
When markets are falling, it is psychologically difficult for an investor to enter.
On the other hand, when the market is at a peak, a lot of investors enter the market. Due to this, the investor ends up buying high and selling low. So, it is very important to continue with the SIP even when the markets are falling. In the current volatile market, starting an SIP would be beneficial to an investor as he can take the benefit of the highs as well as the lows and can average out his purchases and benefit from the market appreciation over time. Your investment of Rs 1000 all compound each month along with the applicable returns and this adds up over time to give you a reasonable amount.
Now, imagine an ELSS scheme which grows your capital from Rs 36000 to Rs 67492 in 3 years! This investment gives you tax saving benefits, dividends and capital growth and ALSO accidental death insurance cover!!! What more can you ask?
INTRODUCING – ELSS Funds from Principal Mutual Fund
Principal Personal Tax Saver Fund
o Principal Personal Tax Saver Fund has generated returns of 43.24 percent (benchmark: 38.92 percent) over 3 years and has performed consistently since inception through different market periods*
o Attractive Dividend Track Record – 220 %@ paid out since October 2007 (through 2 separate dividends payouts) to enable investors to encash part of the returns (Payouts by the fund to its investors are at the discretion of the Trustees to Principal Mutual Fund, and subject to distributable surplus available)
o Rated CPR 1** by Crisil which indicates “Very Good Performance”
o Ranked # 68 among the World’s 100 Top Performing Equity Schemes by LIPPER^
o Winner of Five Star Award at the ICRA Mutual Fund Awards 2008 for its 1 year performance as on December 31, 2007#
o Special Feature in the industry: Accidental Death Insurance Cover provided by the fund. Please read the offer document for more details, including insurance specific conditions.
Principal Tax Savings Fund
o Principal Tax Savings Fund has generated returns of 45.65 percent (benchmark: 35.66 percent) over 3 years and has performed consistently since inception through different market periods*
o Rated CPR 1** by Crisil which indicates “Very Good Performance”
o Ranked # 77 among the World’s 100 Top Performing Equity Schemes by LIPPER^
o Winner of Seven Star Award at the ICRA Mutual Fund Awards 2008 for its 1 year performance and Five Star Award for its 3 year performance as on December 31, 2007#
o Special Feature in the industry: Accidental Death Insurance Cover provided by the fund. Please read the offer document for more details, including insurance specific conditions.
SIP Performance:
|
Principal Personal Taxsaver Fund (PPTSF)
|
|
SIP Period
|
SIP Returns (%)
|
Investment Amount (Rs)
|
Value of Investment (Rs)
|
|
PPTSF
|
BSE100
|
PPTSF - SIP
|
BSE100
|
|
1 Year
|
51.21
|
35.24
|
12,000
|
15,051
|
14,138
|
|
3 Years
|
45.70
|
38.07
|
36,000
|
67,492
|
61,306
|
|
5 Years
|
45.62
|
39.80
|
60,000
|
179,266
|
157,101
|
|
7 Years
|
41.07
|
35.72
|
84,000
|
356,357
|
296,546
|
|
10 Years
|
36.01
|
26.25
|
120,000
|
813,570
|
481,251
|
|
Since inception
(12/04/1996)
|
36.07
|
22.68
|
141,000
|
14,27,009
|
593,129
|
Note: Returns as on January 31, 2008. Last SIP Date = January 5, 2008, SIP Amount = Rs 1000 per month
So what are you waiting for? Start saving regularly every month and invest in an ELSS option to not only save tax but also grow your capital systematically and benefit from the rule of compounding and rupee cost averaging. Pick the right fund to invest after checking past performance. ELSS funds like these make this easier!
DISCLAIMERS
* Principal Personal Tax Saver Fund (PPTSF) has outperformed its benchmark consistently over 1 year, 3 years, 5 years and since inception with returns of 46.80 %, 43.24 %, 48.37 % and 34.60% vs. BSE 100 returns of 32.12 %, 38.92 %, 42.58 % and 16.22 % respectively. Principal Tax Savings Fund (PTSF) has outperformed its benchmark consistently over 1 year, 3 years, 5 years and since inception with returns of 38.02 %, 45.65 %, 52.71 % and 25.75 % vs. S&P Nifty returns of 25.83 %, 35.66 %, 37.57 % and 14.83 % respectively. (Returns as on January 31, 2008 and are calculated on compounded annualized basis. Past performance may or may not be sustained in the future)
@ Attractive Dividend Track Record - 110 % Dividend on December 31, 2007 - Dividend of Rs 11 per unit on a face value of Rs 10 declared at a cum dividend NAV of Rs 221.26 on December 31, 2007. 110 % Dividend on October 30, 2007 - Dividend of Rs 11 per unit on a face value of Rs 10 declared at a cum dividend NAV of Rs 195.17 on October 30, 2007. Past performance may or may not be sustained in the future.
** CRISIL CPR 1 - The composite performances of Principal Personal Tax Saver Fund and Principal Tax Savings Fund in the Equity Linked Savings Schemes (ELSS) Category (19 schemes) are “Very Good” and rank within the top 10% of the schemes ranked in their respective categories. The criteria used in computing the CRISIL Composite Performance Rank are Superior Return Score, based on NAVs over the 2-year period ended December 31, 2007, Concentration and Liquidity of the scheme. The methodology does not take into account the entry and exit loads levied by the scheme. The CRISIL CPR is no indication of the performance that can be expected from the scheme in future. A detailed methodology of the CRISIL CPR is available at www.crisil.com. Rankings and Award Source: CRISIL Fund Services, CRISIL Ltd.
^ LIPPER DISCLAIMER: Principal Personal Tax Saver Fund has secured a rank of 68; Principal Tax Savings Fund has secured a rank of 77 among the 100 top performing equity funds in the world during the year 2007, as per Lipper data. The customized report, highlighting the 100 top performing equity funds in the world during the year 2007, is based on the study of all funds under the equity asset class tracked by Lipper, and having a minimum track record of at least one year as of December 2007 end. In total 24,887 equity funds (primary) qualified for the study. All returns are denominated in INR for the period ending on 31st December 2007. Data source: Lipper, a Reuters Company (www.lipperweb.com)
# ICRA Mutual Fund Awards 2008: Principal Tax Savings Fund (ICRA – Equity Tax Planning category – 18 schemes) has been given the Seven Star Award, and Principal Personal Tax Saver Fund (ICRA – Equity Tax Planning category – 18 schemes) has been given the Five Star Award for their 1 year performance by ICRA Mutual Funds Awards 2008 till December 31, 2007. These ranks indicate top performance within the specified category for their 1 year performances. Principal Tax Savings Fund has been given the Five Star Award by ICRA Mutual Funds Awards 2008 in the category ICRA – Equity Tax Planning (13 schemes) for its 3 year performance till December 31, 2007. This rank indicates top performance within the specified category for its 3 year performance. The ranks are an outcome of an objective and comparative analysis against various parameters, including: risk adjusted return, fund size, sector concentration, portfolio turnover, liquidity, company concentration and average maturity. The ranking methodology did not take into account entry and exit loads imposed by the Fund. The ranks are neither a certificate of statutory compliance nor any guarantee on the future performance of the funds mentioned.
Ranking Source & Publisher: ICRA Online (www.icraonline.com)
Statutory Details: Principal Mutual Fund has been constituted as a trust with Principal Financial Group (Mauritius) Limited, Punjab National Bank and Vijaya Bank as the co-settlors. Sponsor: Principal Financial Services Inc., USA. Trustee: Principal Trustee Company Private Limited. Investment Manager: Principal Pnb Asset Management Company Private Limited. Risk Factors: Mutual funds and securities investments are subject to market risks and there can be no assurance and no guarantee that the objectives of Principal Mutual Fund can be achieved. As with any investment in securities, the NAV of the units issued under the scheme(s) can go up or down, depending upon the factors and forces affecting the capital markets. Past performance of the Sponsor/ AMC/ Principal Mutual Fund/ Punjab National Bank/ Vijaya Bank does not indicate or guarantee the future performance of the Schemes of Principal Mutual Fund. Principal Personal Tax Saver Fund (An open-ended Equity Linked Savings Scheme; Investment Objective: To provide long term growth of capital. The Investment Manager will aim to achieve a return on assets in excess of the performance of BSE 100 Index. Load Structure: Entry Load: 2.25%. For Direct Investment - Nil. Exit Load: Nil) and Principal Tax Savings Fund (An open-ended Equity Linked Savings Scheme; Investment Objective: To build a high quality growth oriented portfolio to provide long-term capital gains to the investors. The scheme aims at providing returns through capital appreciation. Load Structure: Entry Load:2.25%. For Direct Investment – Nil, Exit Load:Nil.) are only the names of the Schemes and do not in any manner indicate either the quality of the Schemes or their future prospects or returns. The Sponsor is not responsible or liable for any loss resulting from the operations of the Mutual Fund beyond the contribution of an amount of Rs. 25 Lakhs towards setting up Principal Mutual Fund. Investors in the scheme(s) are not being offered a guaranteed or assured rate of return or monthly or regular/periodical income distribution, and the actual returns and/or periodical income distribution of an investor will be based on the distributable surplus. For scheme specific risk factors, terms of issue etc. investors are urged to read the Offer Document carefully and consult their legal/tax/investment advisor before they invest the Scheme. Copy of offer document of the scheme(s) can be obtained at the investor service centers of AMC and our Toll Fee No.: 1800 22 5600 and Website: www.principalindia.com
As is evident from the table above, ELSS schemes have helped investors generate significantly higher capital appreciation with the lock-in period of 3-years.
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