It’s that time of the year when the tax season comes to an end. It is also the time when individuals realise that procrastination is a bad idea when it comes to investments. (It’s almost always a bad idea, but let’s not deviate.)
I have read posts in the media urging investors to hurry with their investments in ELSS funds. Along with suggestions to break up the investment into a few instalments (SIPs) till March 31, in a last-ditch effort to avail of rupee cost averaging.
Let me explain.
An ELSS is an acronym for Equity Linked Savings Scheme, a diversified equity fund with a tax benefit under Section 80C. Investors have till March 31, the end of the financial year, to complete their investments.
At Morningstar, when it comes to diversified equity funds, we always suggest the systematic investment option, or SIP. But with the tax deadline around the corner, one wonders about the rationale.
Firstly, SIPs are implemented for a minimum of 6 months or 12 months (though you can terminate it anytime). So instead of SIPs, what is recommended is investing in a few tranches over the next 70-odd days.
If the investor wants to allocate around Rs 1.5 lakh towards an ELSS, and her cash flow does not give her the luxury of investing it at one go, she may want to break it up over a few instalments.
If she is not hard pressed for funds and has a lumpsum available, then she should just invest it in one shot. Unless of course, she believes that in this volatile market she would prefer some emotional comfort by breaking up the investment.
At this juncture, I would like to quote Financial Coach and Investment Adviser Mahesh Mirpuri, who says that he does not believe staggering the investment over 8 weeks helps in any way. "Either a year-long SIP, preferably one over many years, or a lumpsum if you are investing now, in the last quarter of the financial year."
Investors must realise that they are pushed into a corner during the fag end of the financial year simply because of bad financial planning. Had thought gone into this in the month of April, they would not find themselves in a tizzy now.
An investment in an ELSS should be made in conjunction with the overall portfolio. Here's how.
#1 For starters, consider it after you have also taken into account how much of the limit under Section 80C (Rs 1.5 lakh) has been consumed due to your EPF and PPF contribution, principal repayments towards your home loan, premium towards life insurance, and children’s tuition fees.
#2 Then look at your equity and debt allocation. If you are over exposed to equity, then you could consider National Savings Certificate (NSC) or Public Provident Fund (PPF), depending on your requirements. If you are over exposed to debt, then you could consider an ELSS.
#3 When selecting an ELSS, the decision must be made in conjunction with the entire equity portfolio. Within the equity gamut, how does it fit in with your other funds? Do remember, these are actively managed diversified equity funds. That gives the fund manager complete leeway on what must comprise his portfolio. One fund’s mandate will not be the same as the other. Check the market-cap tilt and other aspects as you would in any other fund selection.
Here are a list of ELSS funds that our analysts looked at in 2018:
