Take small steps to ensure better returns

Regular investing helps if you do not have a large amount of money to invest
Vivek Kaul
Mumbai

It was two hours past midnight and Kavi Kumar was still awake. He was thinking about the woman with long hair who had been taking the 10.44 a.m. Churchgate local from Andheri, along with him, for the past few days. The first thing that hit him about her was that her hair was not coloured. Kumar was whistling an old Peter Sarstedt number, But where do you go to, my lovely ,When youre alone in your bed, Tell me the thoughts that surround you, Want to look inside your head, yes I do. And since all good things come to an end, he suddenly remembered he still has not done his tax planning for the year. He thought he should invest some amount in equity-linked savings schemes (ELSS). It was one of the investment avenues under Section 80C, where he could invest up to Rs 1 lakh and claim tax deduction. The next day, Kumar went to the bank and invested Rs 60,000 in one of the tax-saving schemes. There he got introduced to Ashish Subramanian, a wealth manager with the bank. Subramanian asked Kumar “Why did you invest Rs 60,000 at one go?”“Well, for the simple reason that I have to invest before March 31, 2006, if I want to avail tax benefits,” replied Kumar. “But what was stopping you from investing smaller amounts regularly throughout the year?” Subramanian, retorted. Kumar couldnt give a reply. “If I had invested regularly in tax planning funds, would that have helped?” asked Kumar. “Well, to give you a very simple answer, regular investing helps if you do not have large amount of money. But that would be a very simple way of looking at it. Lets take your example. You invested Rs 60,000 at one go on March 1, 2006. Lets assume you had purchased the units of HDFC Tax Saver fund. The net asset value (NAV) of the fund, as on March 1, 2006, was Rs 119.134. Other than this, the fund would have also charged you an entry load of 2.25% of the NAV. So, the price of a single unit would have been Rs 121.815 (119.134 +.0225 X 119.134). Thus, the number of units you would have been able to buy is 492.552. Now, instead of investing in one go, if you had invested on the first day of every month (or the next possible day, if the first day was a holiday) starting from April 1, 2005. Every month, you invest Rs 5,000, so that by the end of the year, you have Rs 60,000 in tax-saving schemes. This regular investing in mutual fund jargon is known as investing through a systematic investment plan (SIP). In case of an SIP, mutual funds charge a lesser entry load. For HDFC Taxsaver, the entry load is 1% of the NAV. After investing regularly every month, you would have ended up with 658.114 units whose market value would have been Rs 78,403.70,” Subramanian said.“Is this phenomenon common to other tax-saving funds?” asked Kumar. “Lets take the case of Prudential ICICI Tax plan. If you had invested Rs 60,000 on March 1, 2006, you would have got 741.467 units of the fund. Instead, if you had invested Rs 5,000 regularly at the start of the month, you would have ended up with 961.197 units, whose market value would have been Rs 76,069.17,” replied Subramanian. (The example is hypothetical)