Tuesday, August 26, 2008

Lump sum vs SIP in ELSS

Every fund house has been touting the benefit of SIPs for quite some time now and how it is relevant for long term asset building. I firmly believe that is the right direction in terms of building an asset. One thing that does stand out is the fact that we have a concept called as ELSS in India. ie. Equity linked savings scheme. Essentially this is a equity based mutual fund that allows for tax saving.

So what is the implications of doing a SIP on an ELSS. Well here are the gotchas

  1. ELSS has a 3 year lock-in. So that if you do a SIP on this, each installment will have a lock in for 3 years. So your SIP will become your SWP :)
  2. If you pick a dividend reinvestment option, each time a dividend is issued by the fund house, that would get invested on that day back into the ELSS which will result in a 3 year lock-in of that dividend.
  3. All your gains will be taxfree (considering today's tax rules) since this will qualify for long term capital gains tax on equity which is currently 0%
Hope this information helps you make the right decision on SIP with ELSS.

This post was written by Vivek Venugopalan on the blog Personal Finance in India - The not so obvious stuff

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Sushil said...

You can’t open a newspaper or read a magazine without seeing ads promoting the stellar performance of “hot” mutual funds. But past performance is not as important as you may think, especially the short-term performance of relatively new or small funds. As with any investment, a fund’s past performance is no guarantee of its future success. Over the long-term, the success (or failure) of your investment in a fund also will depend on factors such as
the fund’s sales charges, fees, and expenses;
the taxes you may have to pay when you receive a distribution;
the age and size of the fund;
the fund’s risks and volatility; and
recent changes in the fund’s operations.
So, look at more than the fund’s past performance when making your investment decisions. Read the fund’s prospectus and shareholder reports,

Sushil girdher said...

For a more informed investor who has the time to research, I would recommend selecting mutual fund schemes to invest in based on the following criteria.

1. Longterm Performance , consistency in Returns
2. Short Term Performance (though a fund has performed well in the past, is there a let down in short to mid term performance)
3. Performance across market cycles, like during bullish and bearish phases (how well did the fund perform during the bearish phases)
4. Fund Corpus (When selecting midcap funds, the corpus size is very important)
5. Fund Managers performance with the scheme(If a fund just got a new fund manager, I would observe the performance under this new manager before I select the fund)
6. For equity mutual funds, one will also need to evaluate risk. (Exposure to midcaps, Standard Deviation of the fund)
7. For debt mutual funds, apart from risk one also need to examine entry/exit loads and expense ratio are very important.

skyhiprofit said...

In this market if you see the amount of investment left after this blood bath then you can see that people who have invested in lumpsum have lost more and those who have invested in SIP have lost less so i think it is more advisable to enter a SIP rather than a lumpsum.

And in these days if any new fund house is coming up with an NFO then i think that will be good to get started into.

As all the existing funds have invested their some amount of corpus if not all and as this is the right time to invest in equity so i think a new fund will be in a better position to give good results.