In India, mutual fund as a tax saving option comes after PPF and insurance. So the discussion opened with the moderator asking how mutual funds could help investors save on taxes if that's the only goal for an investor. Tax savers could invest in equity linked savings schemes (ELSS) which have worked very well in the past and have three-year lock in but one could hold the investments for more than three years as well.According to Agarwal, compared to other tax saving instruments, ELSS are the best option for the same. In the last 15 years, ELSS have given average annual returns of about 20% while if one considers other tax saving instruments, returns have been in single digits.
On the issue of comparing ELSS with unit linked insurance policies (ULIPs), according to Shah, ULIPs give insurance cover along with investment objectives, compared to ELSS which are pure investment-led products.However, all financial planners believe that every investor should have insurance and have financial objectives separately. The unanimous view of the panel was that for insurance the best option is to buy a term policy and invest the rest of the money in mutual funds.
Another tax saving option now available is the National Pension Scheme (NPS) which, for some, is emerging to be more attractive than ELSS. So the question was if one were to choose between NPS and ELSS, what would be a better option.According to Badrodia, the extra Rs 50,000 contribution into NPS which has now been allowed makes NPS more attractive from tax saving perspective, but one should keep in mind that the final income from NPS is taxable. Also, according to him, one can invest in ELSS on a monthly basis, rather than investing a lumpsum in March, just before the financial year ends. Another problem with NPS is that if an investor wants to choose a higher equity allocation, that is not possible. Most salaried people invest in employees' provident fund, a pure debt option, so if they want to have a better asset allocation, then NPS may not be the best option. As a salaried employee who has PF deductions, it is not advisable to opt for NPS or any other tax saving investment option than mutual funds, Badrodia said.According to him, if one had invested Rs 1,000 every month for the last 15 years, that is about Rs 9 lakh total in any diversified equity scheme, that investment today would be Rs 69 lakh.
It also emerged that in the last 30 years, the sensex has given a return of 100 times while most mutual funds have beaten the sensex handsomely. It was clear that for superior long term return, equities were the best options.
On the question of selecting thematic fund and how to select a good fund and a good fund manager, according to Shah, the first step for investing in an equity fund should be to invest through diversified funds, this is after ELSS investments have already started. Then there should be about 10-20% allocation into specified thematic funds which could give one additional returns obver and above what a diversified equity fund could give. So one should not start with thematic fund but it could come in the later part of asset allocation process. But the general view was thematic funds are for very savvy investors and retail investors should stay away from it.
The next question was to differentiate between a good advisor from a bad one, and where to find one.The first thing to ask is if a person is coming with a product or is he coming with an idea. According to Badrodia, a good advisor will always try to understand your financial needs and get you products according to their needs. On the other hand, agents try to sell products which may not be suitable for an investor's financial needs.
On the question of how to choose the best fund among the several present in the market, panelists feel that one of the main criteria is to select one from those fund houses which have a long track record. Also one should hold between five and eight funds, and anything more is over diversification and anything less is under diversification. According to Shah, in the last 15 years, the top performing funds among equity diversified space have given annualized returns of 24% to 26% while the laggards in the same space have given returns of about 12% to 14%, that is about half the top performers. So, according to Shah while choosing a scheme, one should look at the track record over a long period of time and the performance of the investment team.
To a question from a person who is due for retirement and wants a fixed income every month, Shah said that he could invest in those schemes which give a monthly return only from the returns the scheme generates without touching the principal amount.According to Badrodia, he could choose between equity and debt mutual funds and settle for funds which are tax efficient. They feel it's very important to have tax efficiency in mind while making such investments.
To a query whether a small investor should go for smallcap and midcap funds, or should stick to diversified equity funds only, Agarwal was for diversified equity funds. However, Badrodia felt although small and midcap funds have done relatively better than diversified equity funds, but the volatility is very high. Also if the time period for investment is short, then there is higher chance of loss of money in these funds.
To a query about the difference between a close ended and opened ended funds, and their benefits, Agarwal explained that in close-ended funds one can not withdraw his money as and when required but only at fixed intervals, while in open ended funds one could withdraw money as and when requited. One of the advantages of close-ended funds is it allows the fund manager to take a longer term view of the stocks since the money is locked in and there is no chance that he will be forced to sell part or whole of his portfolio of stocks. However, most panellist preferred open-ended funds over closed-ended ones.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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