If you belong to a class of investors that had flocked to equity-linked savings scheme (ELSS) in order to see a decline in their lax liability, then the arrival of Direct Taxes Code has just played spoilsport. In effect from April next year, ELSS funds will no longer enjoy any tax benefits that were earlier bestowed onto it. You will not receive any deduction in taxes by showing ELSS as a part of your portfolio. In spite of losing their tax benefit, these funds are expected to continue their functioning in the market for quite some time with the help of mergers. Several ELSS funds are expected to be merged with equity funds, although this move may prove to be quite a slippery ground for fund houses. This is because most of these schemes possess high AUMs, thereby making it difficult to create nay synergy from these mergers. Also, since these funds come with a ‘lock-in’ feature, investors are not permitted to sell the funds for a period of 3 years.
In this scenario, investors do not have to panic and redeem their ELSS units as this would just lead to large-scale confusion. Also, these funds will be liable for tax deduction until the period of March 2012, and thereby, investors must seek to benefit from this for as long as they can. Investors can also continue their Systematic investment Plans (SIPs) in these funds as they too will be eligible for tax benefits. If you have already made your SIP payments towards your ELSS, then they will be exempted from DTC. Once DTC is applicable, investors need to be wary by cancelling their Electronic Clearing Service (ECS) mandate held with banks. You can then switch your SIPs to any consistent equity fund.
As an investor, use this situation to your maximum benefit and continue investing until the DTC becomes applicable. If you have SIPs in your ELSS, then continue making payments towards it until the DTC net kicks in. Once applicable, stop your payments immediately and move your SIPs to a top mutual funds performer that has shown consistent performance as compared to its peers, as well as over different time frames. Do not be hasty to get rid of your ELSS units now as the Government may provide tax benefits even with its introduction from the next fiscal year.
Apart from this, stick to your basic fundamentals. Do not save all your funds into one single investment. In the eventuality of a market downfall, your savings are threatened to a level, where your returns might become nil or even negative, In such cases, you are left with the only option of borrowing credit like a personal loan or a home loan etc to finance your requirements. This is not the situation that you wish to be in since the entire point of opting for the savings and investment route is to avert yourself from the possibility of opting for debt. Also, in the eventuality of opting for debt, make sure that you repay your installments on time so that you Credit information report (CIR) does not show any defaults. Doing so, you will be in a position to opt for further debt in future since your loan application is likely to be accepted due to your strong financial standing. This will not be possible if the CIR reads otherwise. Therefore, opting for debt may not be a completely bad idea however it is the payment of which that determines your financial credibility in the eyes of your bank. After all it is your money that is at stake; make sure that you take prudence while formulating your investment decisions.