D’s Equity Loss Savings Schemes And Why Investing Just To Avoid Paying Income Tax Is a Really Bad Idea

by Vinaya HS on June 15, 2012

in Finance

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A few years back, in the good old bull run, someone advised D to invest in a couple of Equity Linked Savings Schemes (ELSS) in order to avoid having to pay income tax. Taking the advise in good faith, D invested Rs 75,000 in two ELSS mutual funds. Today, after about four plus years, their combined value is a mere Rs 60,000.

Back then, an amount equal to Rs 7,500 (75,000 x 10%) was saved from being paid as income tax, but today, the loss is exactly double of that.

On the other hand, if that income tax was paid and the remaining Rs 67,500 (75,000 – 7,500) was simply kept in a fixed deposit or even just left to idle in a savings account, I wouldn’t be writing this post today.

D still has the original account statements and for one of the ELSS funds I found an entry load of Rs 500-plus for an investment amount of Rs 25,000. Seriously! I doubt if these two mutual funds are going to do any better in future and I’m think of recommending to D to cut her losses now.

Reminds me of something I said about 3-years back — investing just to avoid paying income tax is a really bad idea.

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{ 7 comments… read them below or add one }

Swapnil Maknikar June 15, 2012 at 4:50 PM

I completely agree with your saying that investing just to avoid paying income tax is a really bad idea. I would rather pay more tax (I actually did last year) than investing in bad product like Jeevan Anand or being into a situation when you need money but have no liquidity.
In your case as you mentioned you invested in bull run so returns of ELSS funds are more or less reflection of market. Even if you had invested in any other diversified mutual fund return wouldn’t have been great so I think it is not fault of ELSS as such. I think ELSS is very good tax saving product along with PPF. It has shortest lock in period & you get to participate into market. After 3 years of lock in period is over you can redeem & reinvest the same money in again ELSS or PPF & get the tax benefit again.
Whether to invest in ELSS or PPF or doing FD should be as the your asset allocation & financial plan.

Vinaya HS June 16, 2012 at 1:05 PM

@Swapnil Maknikar –

Agreed. Many of my own mutual fund investments are either in the red or are at the on-par mark. The problem is the “once bitten twice shy” phenomenon. 75k becoming 60k after 4-odd years. It’s pretty hard to convince someone to re-enter the same instrument once they’ve seen this level of performance. :-)

Jason June 16, 2012 at 8:40 PM

First, I’m surprised by such a article on this blog.
Everyone reading your blog should know the following by now:
Investment in equity has risks and might give good returns only in the long run.
Doing lump sum investment instead of SIP has its own risks as well.

Now if your point was don’t invest to save tax (after reading the article I didn’t get to notice that), then it is okay but if you are talking about “if investing in equity (not just ELSS) is good or bad” then I didn’t expect this kind of article from you.
If it is just ELSS, since you didn’t mention the fund name I’m not sure if it was just a wrong choice of a specific ELSS fund.

Vinaya H S June 18, 2012 at 2:43 PM

@Jason –

Yes. The primary objective was to say “don’t invest just to save tax.” :-)

The ELSS funds in question are –

1. Principal Tax Saving Fund and

2. SBI Magnum Tax Gain Scheme.

Siddhant June 19, 2012 at 11:38 AM

Well, just to give a small comment. if you feel the fund that you have chosen is underperforming drastically. it is better to sell the fund because the MF companies charge the administration charges on daily basis, hence every day of delay is actually costing you 1 to 2.5% on annualized basis.

Vinaya H S June 20, 2012 at 12:02 AM

@Siddhant –

Yeah. You’re right. Some time back, I was wondering why my FMPs were decreasing in value during their first couple of weeks.

Tax Savings Schemes November 30, 2012 at 4:40 PM

Thanks you so much for publishing the awesome information about Equity Loss Savings Schemes . i am also searching these type of information .Its awesome

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