Investors in tax-saving mutual funds need to pull up their socks and invest much before the March 31 deadline.
A new rule came into effect about a couple of months back. SEBI’s rule on NAV applicability means that allotment of units on your investment in a mutual fund (MF) will happen only when the money reaches the asset management company’s (AMC’s) bank account.
So, let’s say you invest in an ELSS scheme on March 31, 2021 (even before the cut-off timings), and for some reason or the other, your money gets credited into the AMC’s account only on April 2, 2021, then you will get the NAV of April 2 and not of March 30.
Effectively, this means you would have invested in the ELSS fund after the end of the financial year. You don’t get tax benefits for FY 2020-21. Instead, your investment will be considered for the next financial year, i.e., FY 2021-22.
Unit allotment only when money is received
You might argue that money was deducted from your account on March 30 itself. But the rule is very clear. It’s not about when the money is deducted from your account. It is about when the money reaches the AMC’s account. And these two might be different days. At times, it might be due to technical issues in the chain of entities through which the money passes. Tt might also be due to some other unforeseen problem.
So, there is no point trying to test your luck by delaying your ELSS investments for FY2020-21 any further. And please don’t be under the impression that you will invest in ELSS funds on the last day, i.e., March 31 and be assured of an allotment the very same day.
I had earlier written about how to decide between SIP vs Lumpsum in ELSS funds. And depending on what type of investor you are, you may pick an approach that suits you. But if you are unsure about your market timing abilities or if you also understand that your lumpsum ELSS investment attempts might be extremely ill-timed due to the entry-time risk, then it’s best to go keep things simple and going forward, just stick with SIP in ELSS funds or for that matter, any equity fund.
Many people have various misconceptions about ELSS funds. But ELSS still remains a pretty useful tool to invest in equity if one is also looking at saving some taxes too. Though other tax-saving options are there like EPF, PPF, insurance premiums, etc. but when it comes to the potential to create long-term wealth via inflation-beating returns, ELSS does a better job. But ofcourse, that is because rest all tax-saving options are debt-oriented while the ELSS funds are equity-oriented.
Why ELSS must not be compared with other products
And for those who constantly do comparisons between PPF and ELSS and try to pick a winner, I would say that comparing ELSS vs PPF isn’t right as both are different assets with different risk-return profiles.
But that aside, do remember that you now need to be careful about the fact that you may not get the NAV of the day you invest in mutual funds. And this is more relevant for those who are investing in equity-oriented ELSS schemes towards the end of the financial year.
So if you Are you one of those who are planning to invest Rs 1.5 lakh in tax-saver ELSS mutual funds in the last week of March this year then please don’t procrastinate. Any more delay on your part and the new NAV allotment rule of MFs might lead you to miss out on investing within the deadline of March 31, 2021 and that would mean, missing out on the tax benefits for this year.
So please don’t wait till the last moment.