Is it possible to save tax and create wealth?

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1 Ventura Research Desk: The article for this month, Is it possible to save tax and create wealth? explains how one can create wealth by beating inflation to earn real returns by choosing the right tax saving investment avenue. It offers insights on tax-saving vehicles by comparing these in terms of returns, tenure, liquidity and risk. The top performing equity and debt mutual fund schemes are highlighted on Page 6 & 7. Happy Investing!! Juzer Gabajiwala Issue November, 2015 Is it possible to save tax and create wealth? Markets: November, 2015, was a month full of events. Domestic equity markets declined over the month, triggered by Bihar election results, disappointing second-quarter corporate earnings, weak macro economic data and selling pressure by foreign institutional investors. RBI has kept its key repo rate unchanged at 6.75% in its bi-monthly monetary policy on December 01, as consumer inflation picked up to a four-month high and markets brace for a US rate hike. India's GDP rose 7.4 % in the second quarter of , faster than the 7% growth recorded in the preceding quarter. This high growth was driven by a robust 9.3% rise in gross value added (GVA) in the manufacturing sector. Industrial production (IIP) rose 3.6% in September, the slowest pace in four months and down from 6.4% in August. In the first half of the financial year (April-September), IIP rose 4% from 2.9% in the year-ago period. The Consumer Prices Index (CPI) based inflation accelerated to a four-month high of 5% in October from 4.4% in September as prices of pulses rose 42.2% because of domestic shortages. The yield on the 10-year government bond rose by 15 basis points during the month to end at 7.79%. According to data released by SEBI, FIIs were net sellers in the equity markets, with total sales of approx Rs. 7,074 crores. On the other hand, domestic mutual funds continued to remain net buyers in the equity markets, with total purchases of approx. Rs. 6,548 crores for the month of November, November, 2015 Smart investing starts here 1

2 *Returns as on 30-November-2015 Global Indices Returns: All major Global markets showed a mixed response for the month of November 2015 with DAX being the highest gainer for the second consecutive month. Indian benchmark indices, the Nifty 50 and S&P BSE Sensex, fell by 1.62% and 1.92%, respectively, in the month of November Top 5/Bottom 5 Equity Schemes Top Performers Under Performers Absolute Absolute Scheme Name Ret.* % (1Y) Scheme Name Ret.* % (1Y) SBI Small & Midcap Fund HSBC Brazil Fund SBI Pharma Fund DSPBR World Mining Fund DSPBR Micro-Cap Fund Kotak World Gold Fund Birla SL MNC Fund Birla SL Latin America Eq. Fund MOSt Focused Midcap 30 Fund Mirae Asset Gobal Commodity Stock Debt Schemes Top Performers Under Performers Annualised Annualised Scheme Name Ret.* % (1Y) Scheme Name Ret.* % (1Y) BNP Paribas Govt Securities Fund JPMorgan India ST Income DWS Corporate Debt Opp Fund JPMorgan India Treasury Fund L&T Gilt Fund ICICI Pru Gilt-Treasury-PF 1.43 Kotak Corporate Bond Fund DWS Inflation Indexed Bond Fund 1.59 Franklin India Dynamic Accrual Fund HDFC Inflation Indexed Bond Fund 1.94 *Returns as on 30-November Smart investing starts here November, 2015

3 Is it possible to save tax and create wealth? Although we are only a few months away from the closing of the financial year , most of us may have yet to undertake our tax savings investments for this year; we tend to wait till the very last moment, i.e. March, to decide where to invest to avail tax exemption benefits. Due to this last minute investing approach, people are somehow able to save on taxes, but not able to create wealth in the long run. So, is it possible to create wealth along with tax-savings and if yes, then how? Just to re-cap, you can get tax deduction of upto Rs lakh under Sec 80C of the Income tax, 1961, by investing in the following tax-saving investment instruments listed below (popular list, not exhaustive): 1. Public Provident fund (PPF) 2. Bank Fixed Deposit- 5 Years 3. Life Insurance Policy 4. Equity linked Savings Scheme (ELSS) Now, let us look at how much tax you can save if you optimize the available investment limit of Rs. 1.5 lakh by investing in any of the above-tax savings investments options: Amount in Rs. 10% Tax Bracket 20% Tax Bracket 30% Tax Bracket TAX SAVED 15,450 30,900 46,350 Income estimates for an individual of less than 60 years of age. As per the present tax laws, eligible investors (individual/ HUF) are entitled to a deduction from their gross total income. While we are aware of the importance of undertaking these investments in order to save on taxes, let us take a look at where we could invest to create wealth from among these available investments options... To create wealth, the objective of investment should be to earn positive real returns i.e. beat inflation on a post-tax basis. The following table shows how different investments have fared with respect to earning real returns on a post-tax basis along with other parameters like tenure, liquidity and risk: November, 2015 Smart investing starts here 3

4 Pre- Tax Returns Public Provident Fund (PPF) Bank Deposit- 5 Years Life Insurance Equity linked Savings Scheme (ELSS) 8.70% 8.50% 5 to 7% 12.29%* Tax applicable Nil 2.63%^ Nil Nil Inflation 7.00% 7.00% 7.00% 7.00% Real Returns 1.70% -1.13% -2.00% to 0.00% Tenure in years 15 5 approx Liquidity Lockin for 15 years (Partial withdrawal from 6th year onwards Lockin for 5 years Withdrawal allowed but with stringest penalties Risk Lowest Lower Lower 5.29% Lockin for 3 years High due to equity market volatility *Average returns of last 10 years for ELSS Category as on Nov 30, ^Tax rate of 30.9%. As seen from the above table, ELSS as an investment instrument has clearly been a WEALTH CREATOR by generating real returns of 5.29% p.a. However, investing in ELSS comes with its own risk of equity market volatility. On the other hand, returns from PPF, Bank Deposits and Life insurance Policies are fixed and stable, but you are not able to create wealth from these instruments. Actually, Bank deposits and Life insurance policies has been WEALTH DEFLATOR'S as you would have earned negative real returns in the range of 1.13% to 2% p.a. However, PPF has been able to earn positive real returns of 1.70% p.a. SIP - The best way to invest in ELSS funds: As most of us run around to make tax-saving investments at the end of the year, we invest a large amount at one go in an ELSS fund; this can be risky. Instead, it is better to spread out the investment across the year by starting an SIP in an ELSS fund in April itself. Lumpsum (Rs. 60,000 invested every financial year from to ) Invested Amount Value as on 31 March 2015 (Rs.) (Rs.) 300, ,032 SIP (Rs.5,000 per month from April 2010 to March 2015) 300, ,945 Difference 55,913 Source: Ace MF, Value as on 31st March 2015, HDFC Tax Saver(G) As seen from the above table, an investor who started investing Rs 5,000 a month in an ELSS fund from April 2010 to March 2015, would have amassed a total of Rs 5.17 lakh. On the other hand, an investor who put Rs 60,000 in the same fund at the end of the every financial year ( to ) would have amassed only Rs 4.62 lakh. Hence, the SIP investor made Rs 55,913 more than the lump-sum investor, which shows that SIP is the best way to invest in it. 4 Smart investing starts here November, 2015

5 Public Provident Fund (PPF) Vs Equity Linked Savings Scheme (ELSS) Consider an example where an investor 'A' has invested Rs. 70,000/- p.a. in PPF since 1999, whereas another investor 'B', has invested Rs /- p.a. in ELSS for the same period. Let us see how the investments of both the investors A & B have fared in the last 16 years. PPF ELSS fund Financial Year Investment amount Rate of interest Interest Year end Value (in Rs.) Investment amount NAV (in Rs.) Units allotted , % 8,400 78,400 70, , % 17, ,208 70, , % 22, ,648 70, , % 31, ,869 70, , % 40, ,707 70, , % 51, ,074 70, , % 56, ,350 70, , % 67, ,360 70, , % 78,656 1,004,016 70, , % 91,291 1,165,307 70, , % 105,001 1,340,308 70, , % 133,979 1,544,287 70, , % 138,829 1,753,116 70, , % 160,434 1,983,550 70, , % 178,659 2,232,209 70, , % 200,292 2,502,501 70, TOTAL 1,120,000 1,382,501 2,502,501 1,120,000 23,410 Source: Ace MF, Value as on 31st March 2015, HDFC Tax Saver (G). In NAV, green indicates NAV has gone up and red indicates NAV has gone down. The below table shows the wealth created by investor A and investor B in the last 16 years in terms of CAGR returns and mentions the number of times by which the return has increased. Investor Invested in Investment amount Value as on 31st March 2015 Gain/ Loss CAGR No. of times returns A PPF 1,120,000 2,502,501 1,382, % 2.23 B ELSS 1,120,000 9,321,167 8,201, % 8.32 Hence, in order to create wealth along with savings of tax, one should not ignore investing in Equity linked Savings Scheme (ELSS funds) and more so, one should adopt Systematic investment plans (SIP) rather than lumpsum investing. November, 2015 Smart investing starts here 5

6 Performing Mutual Fund Plans Debt and Hybrid Funds Corpus NAV (Rs.) Annualised(%) * (Rs. Crs)# Gr Div 1 yr 3 yr 5 yr Income Funds ICICI Pru Long Term Plan Birla SL Medium Term Fund 4, Franklin India ST Income Plan 10,398 3, , Gilt Funds SBI Magnum Gilt-LTP 2, IDFC G Sec-Invest 1, Hybrid - Monthly Income Plans(MIPs) Birla SL MIP II-Wealth 25 1, ICICI Pru MIP 25 1, Crisil Composite Bond Fund Index 2, Crisil MIP Blended Index 3, Debt and Hybrid Funds Corpus NAV (Rs.) Annualised(%) * (Rs. Crs)# Gr Div 3 mths 6 mths 1 yr Ultra Short Term Plan Birla SL Savings Fund 12, Reliance Money Manager Fund 12,649 2, , Liquid Funds Birla SL Cash Plus 21, HDFC Liquid Fund 23,673 2, , Crisil Liquid Fund Index 2, *Returns are compounded annualized as on 30th November 2015 # Monthly Corpus as on 31st October Smart investing starts here November, 2015

7 Performing Mutual Fund Plans Equity and Hybrid Funds Corpus NAV (Rs.) CAGR (%)* (Rs. Crs)# Gr Div 1 yr 3 yrs 5 yrs Equity - Large Cap SBI BlueChip Fund 3, Birla SL Frontline Equity Fund 10, ICICI Pru Focused BlueChip Eq Fund 9, Equity Multi Cap ICICI Pru Value Discovery Fund 10, Franklin India High Growth Cos Fund 3, MOSt Focused Multicap 35 Fund 2, Equity Mid & Small Cap Mirae Asset Emerging BlueChip 1, Reliance Small Cap Fund 1, Equity Sectoral UTI Transportation & Logistics Fund SBI Pharma Fund Tax Saving Scheme(ELSS) Axis LT Equity Fund 6, Birla SL Tax Relief '96 1, Franklin India Taxshield 1, Balanced Fund HDFC Balanced Fund 4, SBI Magnum Balanced Fund 2, Tata Balanced Fund 4, Nifty 50 Index 7, S&P BSE Sensex 26, *Returns are compounded annualized as on 30th November 2015 # Monthly Corpus as on 31st October November, 2015 Smart investing starts here 7

8 Chandigarh Ghaziabad New Delhi Jaipur Lucknow Kanpur Patna Allahabad Guwahati Ahmedabad Vadodara Indore Jabalpur Kolkata Surat Mumbai Pune Nagpur Ahmednagar Warangal Secunderabad Hyderabad Bhubaneshwar Bangalore Coimbatore Tirupur Trichy Chennai Kochi GET LATEST INFORMATION ABOUT VENTURA Our blog Invest-mantra.com/blog Call us Visit us us Post a query mfcustomercare@ventura1.com This document is solely for private circulation only. Mutual funds like securities investments are subject to market risks and other risks. Investors are advised to read the offer document before investing. Corporate Office Address : A1, Kailash Industrial Complex, Park Site, Off LBS Marg, Vikhroli West, Mumbai Tel: mutualfunds@ventura1.com Website : 8 Smart investing starts here November, 2015