Sail the equity market with the benefit of tax saving and forced lock-in to meet your long-term goals.

1. GROWTH PLUS
TAX SAVINGS WITH
ELSS

3. GROWTH PLUS TAX SAVINGS WITH ELSS
CONTENTS
Introduction........................................................................................2
Benefits of equity investing ..............................................................4
What is ELSS and how it helps ........................................................6
Invest with small amounts .................................................................8
The cost benefit of ELSS .................................................................9
Options and lock-ins ....................................................................... 11
How to choose ELSS ...................................................................... 14
How many ELSS to choose............................................................16
How long to remain invested ......................................................... 17
Tax benefits of ELSS .......................................................................18
How to start with ELSS investments .............................................18
Role of ELSS ....................................................................................19
Using ELSS for life goals ............................................................... 20
Common ELSS myths ....................................................................23
Project Editor Kundan Kishore
Copy Editor Sutirtha Sanyal
Art Director Manojit Datta
Design Saji C.S.
Cover Design Manojit Datta
Copyright © Outlook Publishing (India) Private Limited, New Delhi.
All Rights Reserved
No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or
means electronic, mechanical, photocopying, recording or otherwise, without prior permission of
Outlook Publishing (India) Private Limited.
Printed and published by Maheshwer Peri on behalf of Outlook Publishing (India) Pvt. Ltd
Editor: Udayan Ray. Published from Outlook Money, AB 5, 3rd Floor, Safdarjung Enclave, New Delhi-29
Outlook Money does not accept responsibility for any investment decision taken by readers
on the basis of information provided herein. The objective is to keep readers better
informed and help them decide for themselves.
February 2013
[ 1]

4. GROWTH PLUS TA
ELSS
Sail the equity market with the benefit of tax saving
and forced lock-in to meet your long-term goals
W
e work tirelessly through the year to make our life
better for the present as well as the future, but
strangely, when it comes to tax-saving, we wait till
the last minute to decide where to invest and how
much? And more often than not, we either end up investing in
an instrument which gives low return or has a longer lock-in
period. The other scenario is that of overloading our investment
portfolio with the same asset class. As a matter of fact, most of
us invest in tax-saving instruments just for the sake of saving on
[ 2]

5. GROWTH PLUS TAX SAVINGS WITH ELSS
AX SAVINGS WITH
our taxes. If we invest in tax-saving instruments with proper
planning, not only will our investments fetch us a good return,
but also help us achieve our major financial goals such as one’s
own marriage, children’s needs, owning a home and retirement.
However, the choice hinges on our risk appetite, tax bracket and
whether there is a need for regular income. Equity-linked savings scheme (ELSS) can be the product for you given its threeAN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 3]

6. year lock-in period and returns linked to the equity market.
BENEFITS OF EQUITY INVESTING
We all want to enjoy our life. While some want to enjoy it
with family and friends, others want to retreat to some quiet
place. But what most of us fail to consider is that fulfillment of
any vision requires careful planning and, that too, right from
the start. And it is here that investment in right instruments
come into play, for they can fetch you better returns.
As an asset class, equity can provide high returns, but they
also come with their fair share of risks. The challenge lies in
understanding the behaviour of equity markets over a long
period of time—not a year or three years, but over a decade
or even more. Despite some volatility, equity has delivered
the best return in the long run. In the last 10 years, the average return from equity funds has been quite impressive. So,
if you are investing for your long-term financial goals, then
you must have equity in your portfolio. But in the short run,
it’s a risky asset class. As we have seen in the last few years,
stockmarket volatility could lead to capital erosion from your
equity investment.
Also, in order to create wealth over the long term, one
needs to put savings into assets that can deliver higher than
inflation returns. Else, inflation will eat into the returns and
won’t help you in accumulating a corpus. Whatever be your
[ 4]

7. GROWTH PLUS TAX SAVINGS WITH ELSS
risk profile or the quantum of savings, it’s imperative to use
equity-backed investment products to nullify the effect of inflation, especially over the long term. The veracity of using
equity to meet long-term goals have been proven time and
again. Studies done in the past have shown that equity has
delivered higher inflation-adjusted return than any other
asset class over the longer horizon. The underlying message
here is the time horizon; the longer one remains invested in
equities, the better is the return. The advantage comes from
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 5]

8. the power of compounding because the earlier you start investing, the more time your money gets to grow. If you start
saving early, even in small amounts, it will help you build a
sizeable savings portfolio. The rule is to invest regularly and
keep reinvesting the returns so that your earnings also help
in fetching more returns.
A first-time investor in equities should ideally start with
equity mutual funds (MFs). Jumping into the stockmarkets
with little or no knowhow may not be the right thing to do.
An early start to investing with equity MFs also inculcates a
disciplined habit of investing. Stockmarkets remain volatile
in the short-to-medium term but average out over the longer horizon. An investor having seen the ups and down of
such market remains poised for the long haul and is largely
undisturbed with such frequent fluctuations. And most importantly, mistakes made during the initial days of investing
helps one learn the basics of investment that come to one’s
aid in the later stages of life. That said, one can even take to
equity investing with ELSS. They offer market-linked return
and have a shorter lock-in period and also offer a cost-effective way for the small investor to access equity markets.
WHAT IS ELSS AND HOW IT HELPS?
Equity Linked Savings Scheme (ELSS) launched by mutual
funds are open-ended schemes having a lock-in period of three
[ 6]

9. GROWTH PLUS TAX SAVINGS WITH ELSS
years (with no assured returns) and are formulated as per
the notification dated 28 December 1992 as amended on 22
December 1998 and the notification dated 3 November 2005
as amended on 13 December 2005 issued by the Department
of Economic Affairs, Ministry of Finance, Government of India. Further, the Ministry of Finance vide its press release dated 11 November 2005 stated that the Central Board of Direct
Taxes (CBDT) has clarified that investment made on or after 1
April 2005 in the schemes which are in accordance with ELSS
1992 or ELSS 1992 as amended in 1998 are also eligible for
tax benefit under Section 80C of the Income tax Act, 1961.
Investment in ELSS helps one in planning one’s taxes, thereby reducing the tax burden. ELSS investments reduce the
taxable income corresponding to the amount invested and,
thereby reduces the tax liability of the investor under Section
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 7]

10. 80C. As the name suggests, ELSS is a savings scheme that is
linked to equity. Investment avenues for your savings can be
a mix of various asset classes such as equity, debt, gold, real
estate and so on. An ELSS is an MF scheme, which is similar
to any diversified equity MF scheme that routes your investments into the equity markets. Like any other MF scheme, an
ELSS is also managed by professionals known as fund mangers. This helps small investors in accessing the equity market
and also save taxes at a reasonable cost.
INVESTMENT WITH SMALLER AMOUNT
ELSS allows the investor to buy units under a scheme with
a minimum investible amount of `500 and in multiples of
`500 thereafter. Investments can either be in lump sum or
[ 8]

11. GROWTH PLUS TAX SAVINGS WITH ELSS
through the system investment plan (SIP) route. But, considering the volatility in the stockmarkets, it is better to invest in
ELSS through the SIP route. You get to make your investments
in the equity markets with a smaller amount and because the
investment is in an ELSS, you also save taxes. As such one
cannot define the right time to invest in equity MF scheme or
ELSS through SIP. There is no maximum investment cap, but
the tax advantage in ELSS is only up to `1 lakh. ELSS is part of
the Section 80C instruments which are cumulatively eligible
for a deduction from income up to `1 lakh.
THE COST FACTOR
Every investment has a cost attached to it. However, after the
capital markets regulator, the Securities and Exchange Board
of India (Sebi) abolished the entry load on all MF schemes in
2009, one doesn’t have to pay any upfront load on one’s investment. That said, there is still a transaction charge on your
investment if you are a first time mutual fund investor and
wish to invest through a broker. This could be up to `150 if
your investment amount is `10,000 in a year. But if you invest directly with the fund houses, there is no charge on your
investment. Still, you will have to bear an indirect cost known
as recurring expenses on your investment. In simple terms,
the net asset value (NAV) declared by the funds are adjusted
and reduced by this percentage on a regular basis. Theoretically, the recurring expenses chargeable could be up to 3 per
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 9]

12. cent per annum of the average assets of the scheme. However,
in practice, such expenses would rarely exceed 2.50 per cent.
This is because of competition and regulations that require
such charges to be on a sliding scale and is based on factors
such as average assets. Recurring expense includes expenses
incurred on the investment management and advisory fees,
expenses towards brokerage, registrar, marketing, fees of custodian, auditors, trustees and certain other expenses as well.
As per directives from Sebi, mutual funds have introduced
Direct Plan for investors who purchase or subscribe units
in a scheme directly (i.e., not routed through a distributor)
effective 1 January 2013. Direct Plan shall have a lower expense ratio excluding distribution expenses, commission, etc.
[ 10]

13. GROWTH PLUS TAX SAVINGS WITH ELSS
Also, no commission for distribution of units will be paid or
charged under Direct Plan.
ALL ABOUT ELSS—OPTIONS, LOCK-INS
Options. The ELSS funds available may either be the on-going funds which declare their NAVs on a regular basis, or the
new ones, called the new fund offer (NFO), which are in the
process of mobilising funds from investors and will declare
their NAV in future.
As an investor, you can either choose the growth or the dividend option. Some funds also have the dividend re-investment
facility. For making an ELSS investment, you first have to decide on the mode of investment, either lump sum or through
SIP and then choose the growth or the dividend option.
A growth option allows capital appreciation due to the compounding nature of the investment while the dividend payout
option provides liquidity. To some investors, this is a good option as an ELSS has a mandatory three-year lock-in period.
The dividend from the ELSS investment can be invested in
other investment options, either equity or debt, depending
upon the rebalancing needs of the investor’s portfolio and,
thereby, reduce the risk in the overall investment plan. From
the tax perspective, both the dividend and the growth options are equally efficient as the dividends are tax-free. As far
as dividend reinvestment goes, investors should avoid it. One
cannot change the investment option midway in a fund with
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 11]

14. a lock-in period. Thus, if you were to choose the dividend reinvestment option, there will be incremental lock-in of three
years on the dividend reinvested and no tax deduction can be
claimed on such re-invested dividend.
At present, all ELSS available are open-ended and so, provide
the flexibility to invest or withdraw (subject to the completion
of lock-in period) at any time during the year, without being
restricted to any specified time period. In effect, this helps the
investor manage his/her cash flow better. The funds that become open-ended three years into their purchase by an investor allow the investor to continue with his or her investment
and redeem it as per the market condition. However, in the
event of death of the unitholder, the legal heir, subject to production of the requisite documentary evidence, will be able to
redeem the investment only after the completion of one year
or any time thereafter, from the date of allotment of units to
the deceased unit holder.
Lock-in. Investments in an ELSS have a lock-in period of
three years and there is no option to exit early. The lock-in
prevents early withdrawal of your investment and helps your
money grow over a period of time. Experts have always advocated a long-term view for investment in equities. The lock-in
sees to it that you ignore short-term market fluctuations and
remain focused on creating wealth in the longer-term. Besides, when compared to other tax-saving instruments, such
[ 12]

15. GROWTH PLUS TAX SAVINGS WITH ELSS
as the National Savings Certificate (NSC) and Public Provident Fund (PPF), which have lock-ins of six and 15 years, respectively, a three-year exit restriction is on the shorter side.
The lock-in also lends an element of stability to ELSS portfolios. Since corporate money is kept out, these schemes don’t
have to deal with sudden, large-scale redemptions. As a result, ELSS tends to have a more stable corpus and an optimum
corpus size, which encourages better fund management.
Due to this lock-in-period, the Asset under Management
(AUM) remains more stable and the cash flow is more predictable and also leaves fund managers with less burden of managing redemption. This provides the fund manager with greater
freedom to perform. The fund manager can take a medium- tolong-term view on certain stocks; this helps in improving the
returns from the schemes. The lock-in-period of three years in
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 13]

16. ELSS also allows the investor to become more disciplined and
realise the true potential of the investment made.
The asset allocation is as per the ELSS guidelines. The funds
are typically invested in equities, cumulative convertible preference shares and fully convertible debentures and bonds of
companies in the 80-100 per cent range and up to 20 per
cent for debt and money market instruments. The asset allocation in itself speaks for the big tilt towards the equity market. Therefore, ELSS is well-poised to deliver better returns.
Liquidity. The units of ELSS plans have a lock-in of three
years from the date of their allotment. These units can be redeemed i.e., sold back to the fund house on every business day,
at the redemption price, three years after their allotment.
HOW TO CHOOSE ELSS SCHEME- MARKET CAPS,
SCHEME OBJECTIVES, PERFORMANCE
Before selecting an ELSS, ensure that your investment takes
into account your risk profile and the overall asset allocation
of your portfolio. Remember that higher returns from ELSS
come with higher-risk, for the simple reason that the investments are market-linked. These schemes are suitable for investors willing to take higher risk for better returns from their
tax-saving investments.
Choose funds with a longer performance history and trackrecord for investments. The longer the performance history,
[ 14]

17. GROWTH PLUS TAX SAVINGS WITH ELSS
the longer time a fund has to test its mettle in various market situations. That would also make it easier for the investor to evaluate consistency in a fund’s performance. The
performance of the fund should be compared with that of its
benchmark and peers. An investor should also assess the risk
and return strategy of the fund and take a call on whether
he is comfortable with it. Fund houses with strong and established processes and the ones that focus on fund management
teams rather than star fund managers are better.
The focus of the fund’s portfolio to different segments of the
market, such as large-, mid- and small-cap, gives an indication of the volatility that an investor can expect in a fund.
However, majority of the ELSS are inclined towards large-cap
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 15]

18. stocks as far as portfolio building is concerned. Also the threeyear lock-in reduces the risk in equity investing to a great extent and allows the fund manager to choose stocks with longterm potential without liquidity concerns. One should also
look at the type of fund management style ELSS funds carry
and whether they invest in value or growth stocks. The biggest advantage of an ELSS is that it allows investors to choose
products according to their risk appetite. The suitability of a
fund depends upon the compatibility of the fund’s strategy
with the risk appetite of the investor.
HOW MANY ELSS SCHEMES SHOULD ONE HAVE?
There is no fixed rule to this. Around 2-3 schemes can be a
part of your portfolio depending on your investment amount.
[ 16]

19. GROWTH PLUS TAX SAVINGS WITH ELSS
It helps you diversify across different fund managers too. Too
much of them could be a deterrent as well. Managing them
and tracking them will be difficult. Besides, there could be
overlaps in the stocks they hold, thus reducing the advantage
of a concentrated portfolio. Have a look at their individuals
portfolios to determine the mid-cap or the large-cap focus of
the funds and then take a decision.
HOW LONG TO REMAIN INVESTED IN ELSS
Ideally, there is no maximum limit on the time horizon you
can remain invested with the fund. However, once the threeyear lock-in period is over, you need to closely monitor the
scheme’s performance. If it is at par with other open-ended
equity schemes, you can remain invested with the scheme.
But if the scheme is lagging on performance, you can switch
to better performing equity saving schemes.
Also, if your existing investment has completed three years
and you have to invest again for the current year, you may like
to reinvest the corpus in the same scheme to get the tax benefit
of the current year without having to make any additional investment provided the scheme performance is at par with its
peers. If your ELSS investment made in the past is about to mature in the next 3-6 months, you need to decide carefully. Once
you complete three years in an ELSS, review your investment.
After all, one of your objectives (the tax deduction) has been
met. Tax laws don’t allow a rollover for claiming benefit under
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 17]

20. Section 80C. They insist on fresh investments. So, evaluate your
“matured” ELSS investment as a normal equity investment and
base your decision to stay on or exit on your perception of the
market and the need for funds. You could either liquidate all or
partial units. But if you don’t require funds urgently, postpone
liquidation to few more months.
ELSS TAX BENEFITS— INCLUDING FOR SIP MODE
Lump sum or in instalments. You may either invest in
lump sum or choose the SIP mode. Identifying the scheme and
starting a SIP would ensure that the investor benefits from lower acquisition costs through rupee cost averaging in a volatile
stockmarket. Investing periodically also spreads the burden.
However, remember that each instalment will be subject to
a three-year lock-in. So, if you enroll in a three-year SIP and
invest systematically every month for three years, you will get
your entire proceeds only after six years (after your last instalment at the end of the third year completes three years).
HOW TO GET STARTED WITH ELSS
When you start working, the savings for tax-saving investments could typically be your entire savings, as the expenses
are pretty high at this stage of your life. Like the rest of your
working life, during this period too, your provident fund savings will by default take up some portion of the total deduc-
[ 18]

21. GROWTH PLUS TAX SAVINGS WITH ELSS
tion under Section 80C of the Income Tax Act, 1961. During this stage of your life, since you are likely to be without
major responsibilities or liabilities, you can take risks with
your investment such as those involved in equity MFs. This is
why many financial experts recommend investing in ELSS of
MFs. With ELSS, you can invest even amounts as less as `500
every month in equity MFs through SIPs.
ROLE OF ELSS IN INVESTMENT PORTFOLIO
As discussed earlier, it’s best not to own more than 2-3 ELSS
in one’s portfolio. Also, ELSS should be treated as part of the
overall portfolio and not merely as a tax-saving instrument.
By keeping a few strategies in mind, an investor can make the
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 19]

22. most of his or her investment.
Keeping financial goals in mind. Every ELSS adopts different stock picking strategies. Some schemes maintain a largecap focus and are suitable for investors who have a lower risk
profile. On the other hand, funds that have greater exposure to
small- and mid-cap stocks fit the portfolio of an investor willing
to take a higher degree of risk. Ignoring this aspect could lead
to a mismatch between the fund and the investor’s profile.
Diversify among styles. The role of ELSS in a portfolio is
restricted to providing tax benefits without compromising on
the return. It cannot form the core of your MF portfolio. A
portfolio should at most stick to two ELSS with varying investment styles in the market if one wishes to diversity.
USING ELSS FOR LIFE GOALS—MARRIAGE,
CHILD’S FUTURE, HOME BUYING & RETIREMENT
Investors can use ELSS investment to fulfil their life goals, such
as their children’s future, retirement planning and home buying. The only thing one needs to do is link his or her goals with
the time horizon left for each specific goal. As a rule of thumb,
an investor should focus on the tenure left for each goal rather
than his or her risk profile. For instance if one is married, his
or her income would have gone up further and so would have
their Employees Provident Fund (EPF) deduction. This would
leave the investor with lesser elbow room for making invest-
[ 20]

23. GROWTH PLUS TAX SAVINGS WITH ELSS
ments under Section 80C of the
Income Tax Act, 1961. If possible, one should increase them
to exhaust the Section 80C limit. In case of a double income
households, one should ensure
that most of the tax-saving investments is from the income in
the higher tax slab. If both the
incomes are in the highest tax
slab, the risk-taking capability
is higher. This means that such
working couple should invest
more in ELSS, besides both of
them investing in PPF. This corpus can either be utilised for
funding the retirement expenses or for the children’s future.
Also, a child’s education, his or her wedding, buying a
house, or retirement require planning as these are long-term
goals. As such, they will require disciplined investing on your
part. Besides, you should also ignore booking profits for the
short-term or else you could end up losing on the compounding effect on your long-term investments. It is here that the
lock-in associated with ELSS comes handy and prevents the
investor from booking profit for the short-term.
Even a person nearing retirement or one who has already
retired, may invest in ELSS, if he or she has an appetite to take
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 21]

24. slightly higher risk to get better return.
As one nears retirement, one typically likes to invest in options that don’t have lock-ins. It is better to keep investing in
existing investments such as PPF and better still, to increase
the contribution to ones EPF since one will be getting the
money shortly and, also to give further impetus to the compounding effect.
As such, plan your investments in ELSS keeping in consideration the year you will be retiring. Remember that you need
to remain invested in equity even in your retirement years to
take care of inflation.
When you are retired, your obligations under Section 80C
might not be much. In addition to fixed income tax savers
such as Senior Citizens Savings Scheme (SCSS) and others, if
you need to save taxes, you may still look at ELSS. The key is
to ensure that not all of your investments are in fixed income
investments since they won’t help you combat inflation.
The two facets that makes the ELSS plans stands apart from
a normal diversified equity plan is the tax-saving feature and
their link with the equity market and, because they are equity-linked, always remember that there is a certain amount of
risk involved: equity schemes are not for the weak-hearted.
Ultimately, you are the best judge of where to invest and
what suits your portfolio best. Let us leave you with one last
thought. If you are planning to invest lump sum in ELSS don’t
[ 22]

25. GROWTH PLUS TAX SAVINGS WITH ELSS
wait till the last minute. Whenever the stockmarket falls by
5-10 per cent, invest some part of it during every correction
to capitalise on the potential uptrend. However, it is better to
invest using a systematic investment plan (SIP) that reduces
the average cost of your holding in a volatile market.
COMMON MYTHS TO AVOID
There are some common myths always associated with ELSS
investments. That needs to be avoided. Some of the common
myths are that low NAV funds are cheaper, dividend declaration in next week or so on, short-term investments, etc. These
three are the most common tricks MF distributors use to lure
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY HDFC MUTUAL FUND
[ 23]

26. investors. However, this does not hold true. Buying last year’s
top performer is the only criteria that many investors use to
select a scheme for inclusion into their portfolio. The conditions that made a fund an outperformer during a particular
period may not exist in the subsequent years. A fund’s performance should be tested for consistency across time periods
and then selected if it matches the investor’s need profile.
So while investing in ELSS, you should look at long-term
performance track record of the scheme, say 3-5 years rather
than their short-term performance or lower NAV. Also, if you
are looking for dividend options, a dividend declaration any
time soon should not be the only criteria. There could be a
possibility that a good performing fund might not be declaring dividend soon at the time of your investment. However, in
the future, it may declare dividend and also reward you handsomely in the long-run in terms of its performance.
AN INVESTOR EDUCATION AND
AWARENESS INITIATIVE BY
HDFC MUTUAL FUND

27. GROWTH PLUS TAX SAVINGS WITH ELSS