Dividend option in ELSS is a very bad idea, say mutual fund advisors
Many investors are choosing the dividend option while investing in Equity Linked Saving Schemes (ELSSs) during the tax-saving season this year, say mutual fund advisors. According to these advisors, investors may be trying to escape the mandatory lock-in period in an ELSS by taking the money out or simply making an uninformed decision. Investments in an ELSS qualify for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. These tax-saving mutual fund schemes come with a mandatory lock-in period of three years.
“A lot of new investors and even the old ones want to sign up for the dividend payout option in ELSSs. This is because they don’t want to keep their money invested for a long time. They just want the tax benefit this year and get out,” says Deepali Sen, Founder, Srujan Financial Advisors. “Since the ELSS comes with a mandatory lock-in period, they go for the dividends to take some money out once in a while,” adds Sen.
Incidentally, ELSSs have the lowest lock-in period among all the tax-saving investment options available under Section 80C.
Neeraj Chauhan, CEO, The Financial Mall, says this could be a behavioural issue with some investors. “Many investors take this option because they are so impatient that they cannot wait for the three years to get over. This should not be the behaviour of an investor,” says Neeraj Chauhan. The current higher levels of the market may be another reason for the investor behaviour. “In the last couple of years when the markets were up, such investors were garnering good returns and taking them out. But the good time might not last forever. In that case, you will hurt your money eventually,” says Chauhan.
Experts like Chauhan ask investors to link their ELSSs with long-term financial goals. “Even if you are investing in an ELSS just to save tax, you should link it to a long-term goal, so that you save taxes and get great returns to reach an investment milestone in your life,” says Chauhan. “An ELSS is an equity scheme and whenever you invest in an equity scheme, you should invest for a long-term goal. That’s the ground rule. If you are investing for a long-term goal, a dividend pay-out is a bad option. Because it will not let your money grow,” adds Chauhan.
So, when should an investor opt for the dividend option? “Taking dividends without a reason in your ELSS schemes has fundamental issues. One, we ask clients to opt for dividends only when they need the money for their monthly expenses or they don’t have any other source of income. Most of these investors do not fall in that category. Secondly, when you take dividends, your capital stops growing. In times of volatility, you will be eating into your own money. Your investment serves no purpose in this case,” says Deepali Sen. She suggests going for an ELSS investment only when you have a long-term horizon and go for the growth option.
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Via:: Economic times – Wealth