Instead of investing money into a tax saving fund (ELSS or whatever), let’s invest our money in some other great fund. We’re looking at doing a small time investment, so choose the fund that has been doing great in the last two years (smaller period shows the popularity of the fund in recent times, though not necessary). So let’s say, we have a top ranking fund called A Company Fund. We choose two other funds (in all 3 funds), B Company and C Company funds (note that all of these funds should be Open Ended). Now let’s break up a monthly investment of, say Rs. 10000 into 3, make a round figure of 3500 each and invest into SIP of these funds from April to December (for 9 months).
Come December, let’s switch in all the investments done in Company A Fund to a Company A Tax Saver fund, Company B fund to Company B Tax Saver and Company C Fund to Company C Tax Saver fund.
Here’s a point-by-point break-up of the same thing:
- Let’s say, you have a tax investment objective of Rs. 50000 from Mutual Funds (assuming rest of you investments are done elsewhere).
- April: Start SIP of 1800 in Company A Fund (a top ranking fund from Company A) for next 9 months (till Dec)
- April: Start SIP of 1800 in Company B Fund … for next 9 months (till Dec)
- April: Start SIP of 1800 in Company C Fund … for next 9 months …
- May: SIP for Companies A, B and C Funds for 1800 each (total 5400 this month).
- June-November: SIPs repeat until December.
- December: Your last SIPs of 1800 each get deducted in Company A, B and C funds.
- Investments in each of Co. A = 16,200 + Co. B = 16,200 + Co. C = 16,200
- Total investment till December: 5400 x 9 = 48,600
- Now, you switch in your individual investments from Co. A, B and C to Tax Saver Funds (of the same companies) including the profits you got.
- Let’s imagine if…
- ..Co. A performed with a profit of 20% – you get back Co. A Tax Saver funds worth 19,440
- ..Co. B performed with a profit of 15% – you get back Co. B Tax Saver funds worth 18,630
- ..Co. C performed with a loss of 10% – you get back Co. C Tax Saver funds worth 14,580
- Your total tax investment for this year would be: 19,440 + 18,630 + 14,580 = 52,650
- Magic right? You exceeded the tax investment objective you had set even after investing a lesser amount.
- Now you have to pay back some capital gains: Co. A = 648 + Co. B = 486 – Co. C = 324 = 810
- Just pay back some tax of ~ 800 (capital gains tax calculated with 20%, a good tax return preparer can bring it down further).
- Including the capital tax gains you paid back, the money you paid for the whole thing was: 48,600 + 810 = 49,410
- And your investment was done for: 52,650 – you saved an investment of 3240.
Those figures don’t impress you, do they? Then, what else is the advantage of doing things this way?
- Your tax savings are done all at once in January.
- This means, after three years, you can draw the whole amount out all at once. When you do an SIP on tax saving, you have to wait month by month for withdrawal.
- The profits you get out of the earlier investments act as a buffer and take care of any market fluctuations at the time of your Tax Investments.
- Also, although you pay tax (10% or 20%) on these profits, you actually get the one lac limit benefit on the same money too.
- Thus you achieve your one lakh goal by investing a lower amount of money through the year.
No really, there should be some disadvantages too? God save you…
- …if the capital tax gains are increased (from 10% or 20%).
- …if you run into losses in all the top 3 funds you chose from Co. A, B and C.
- …if the Tax-Saver funds for the three companies A, B and C somehow stop accepting fresh investments.
But all of the above are circumstances beyond control. And that is where you step in with the word – risk.
So go ahead, and at your risk, try investing in the way above (repeating: try all this at your risk).