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ELSS: Only for tax saving

BS Reporter  |  Mumbai 

I had invested Rs 5 lakh in HDFC Taxsaver Fund in February 2009 just for investment purposes, not to save tax, as I never take tax rebate on my investments. I want to switch my investment into HDFC MIP Long-Term. Is it possible to switch schemes before completing three years?


-Ankur Bhargava

An Equity-linked Savings Scheme (ELSS) has a compulsory lock-in period of three years. So, you cannot switch before that. Moreover, if you do not intend to invest in saving tax, which otherwise is a beneficial proposition, avoid opting for ELSS. Instead, invest in equity diversified funds like HDFC Top 200, Magnum Contra or DSPBR Top 100 Equity.

I am invested in Sundaram BNP Paribas Capex Opportunities Fund since November, 2007. Its returns are in negative, should I exit?


-Manohar Rao

Sundaram BNP Paribas Capex Opportunities Fund is a 4-star rated sectoral fund. It mainly invests in capital goods sector. It has been in the red (minus 10.03 per cent) from November 2007 to February 11, 2010. In 2007, the performance was at its peak. But, in the 2008 downturn, it could not beat its category average. Since then, it seems to be on a recovery mode. If this is the only fund in your portfolio, you must think of getting out. Instead of a sectoral fund, consider a consistent performing equity diversified fund like HDFC Top 200, or DSPBR Equity.

What are the advantages of investing in debt funds, when the returns they give are just around eight per cent or less? I believe the same can be attained by investing in a normal fixed deposit (FD).


-Jagadeesh Kumar

Kanakala FDs are safer investments instruments because the return is guaranteed. But, the main reason to prefer debt funds over FDs is the tax treatment of gains and income. Any gain or income on FD investment is added to the investor's income and taxed accordingly, irrespective of the investment tenure. So if you are in a higher tax bracket, it works much to your disadvantage.

In case of debt funds, the tenure matters. The gains get added to the income if the fund is redeemed within a year of investment. Any redemption after a year attracts a long-term capital gains tax of 11.33 per cent (without indexation) or 22.66 per cent (with indexation). It is worth to noting that the government levies a Dividend Distribution Tax (DDT) on debt funds, which is borne by the fund house (but ultimately passed on to the investor). This is 14.16 per cent of the dividend declared. Nevertheless, investors benefits by opting for a debt fund for a period of more than one year.

I am planning to invest Rs 2,000 via monthly systematic investment plan (SIP). For this, I am considering HDFC Top 200, Reliance Growth, Reliance Vision and Sundaram BNP Paribas Growth Reg. Help me choose suitably.


-Srikanth

All the above mentioned funds are equity diversified funds. While HDFC Top 200 and Reliance Growth have been consistent good performers for the past few years, we have some reservations on Reliance Vision and Sundaram BNP Paribas Growth Reg (both rated 3-star). While the former has been an average large-cap fund, the latter had been a poor performer lately, lagging the category average in both, bear and bull

We suggest you either increase the SIP amount in the first two funds or include one more fund, may be, DSPBR Top 100 or Birla Sun Life Frontline Equity.

Value Research

First Published: Sun, February 21 2010. 00:33 IST
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