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Are you one of those taxpayers who run around to make tax-saving investments at the fag end of the year? March is a busy season for insurance agents because many taxpayers hurriedly buy life insurance policies only to save tax. But mutual fund investors are no better. They invest lump-sum amounts in ELSS funds just to beat the 31 March deadline for making tax-saving investments under Section 80C.
Investing a large amount at one go in an equity fund can be risky. It becomes even riskier if you cannot touch the investment for at least three years. ELSS funds have a lock-in period of three years during which you cannot withdraw or switch to another option.
Unlike a tax-saving fixed deposit or the PPF, where investors can safely put the entire money at one go, ELSS requires a different approach. Being an equity investment, it is exposed to market risk. Your returns will depend to a large extent on the point of entry and exit. If you invest when the market is at its peak, you could end up with losses that might wipe out any savings in tax from the investment. Even if you spread your investment over the last three months of the financial year, it will not reduce the risk to a great extent. If you invest at the end of the year, you will end up timing the market.
Instead, it is better to spread out the investment across the year by starting an SIP in an ELSS fund in April itself. We did a back calculation and found that an investor who started putting `5,000 a month in an ELSS fund from April 2009, would have amassed a total of `4.09 lakh. On the other hand, an investor who put `60,000 in the same fund at the end of the financial year would have only amassed only `3.82 lakh. The SIP investor made `26,300 more than the lump-sum investor
This clearly shows that SIPs should not be treated as a shibboleth, a marketing device that can lure long-term investment. There are real benefits for investors who use this strategy, especially taxpayers who invest in ELSS funds. Instead of running around in panic when the financial year is drawing to a close they can complete their tax planning way before the deadline. What's more, funds often declare dividends around February. If you invest in March, you will get the dividend only after a year.
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