Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

Be careful of investing in ELSS schemes

I have just received a message that Mahindra Finsmart is offering higher commissions to get investment in four ELSS (Taxsaver) funds:

  • Kotak Tax Saver (5%)
  • ICICI Prudential Tax Plan (4.5%)
  • HDFC Long term Advantage Fund (3.5%)
  • Birla Tax Relief 96 (3.5%)

Now I don’t know how this is being paid – most schemes pay only 2.25% as “brokerage” to the agents, out of the entry load. But if larger amounts are being paid, then these schemes will end up paying these commissions out of investors’ funds (where else). It may be done slowly and over years – after all, you can’t withdraw your funds for three years – and will impact returns.

Be careful when putting your money in – I would essentially avoid all ELSS mutual funds for the time being – a PPF or NSCs are probably better bets.

I wish there was a no-load ELSS fund that simply invested in the Nifty, using futures, and put the rest of the money into liquid cash or call markets. This requires no brains – therefore very little management fees. Definitely needs some marketing muscle, though. And this is an industry that survives on commissions, so I doubt it will accede.

  • Mutual Fund India says:

    >Hi,

    you can go for Franklin Index taxsaver…………

  • hari says:

    >Hi Deepak ,

    I was checking out this fund Franklin India Index fund. Here the entry load seems to nil and the exit load is 1%. I am not sure but in the following link it is given that the cost of the fund is quite low —
    http://www.franklintempletonindia.com/GeneralAccess/Mfs/FIIF.asp

    Also on a side note just wanted to share my thoughts with you-
    So long the investors have been buying Tax savers for the long term growth, even when the NAV was high. I feel that they can considerably lower the average acquisition cost now, at least it helps them in accumulating more units,and when the markets reverse they will be the first to benefit.
    Just a case in point– recently when I saw the monthly fact sheet of Birla it said that 1 Lakh invested in 1995 in the tax releif fund is worth 65 Lakhs as on 2007 Nov.
    What I am saying is that real accumulation of MF units happens only when the sentiments are very bad and people can benefit from the diversified portfolio of MF. But high expenses of the fund is something that investors have to be kept note of.
    Correct me if I am wrong.

    Thanks,
    Hari

  • Uday says:

    >Hi Deepak,

    You have suggested PPF or NSC at this point which are very long term, more than 8 years. Don’t you think our share market ( ELSS) will give more returns than these schemes in 8 years from now? Even if we consider ultra safe investment options, what do you think about Five years tax saving deposit in banks like SBI? They are offering interest rate of more than 9 %. will be waiting to hear you thoughts.

  • Puneet says:

    >Although Fraklin Index Tax is an option.. its assets are a measly 1.7 Cr, which is not a good thing for an Index fund.

  • Anonymous says:

    >Hi

    All ELSS mutual funds are doing well when the going is good.When the stock market goes down they also go down. This is amply demonstrated in current scenario. So it is better that not to invest in mutual fund in India.

    The fund managers get salary not on their performance but on assets under management. So they are not bothered about the returns.