Usually mutual fund schemes lure investors in the months preceding the financial year end into ELSS schemes to boost their assets. They also declare huge dividends and set a date for the dividend allotment. When a dividend payout happens on the prescribed date, the NAV of the fund falls by the amount of dividend paid. The dividend thus paid is totally tax free.
Suppose, you have decided that you will put in say 50,000 Rs in an ELSS this year to avail tax exemption under sec 80C. Usually anybody will just go ahead and invest the full 50,000 in the scheme and the work is done. But there is a trick you can play which can save you even more money using the same investment! Suppose you find out a particular scheme which is giving you a 100% dividend this year after 15 days. So for a scheme of face value 10/- you get Rs 10 as dividend for each unit you hold in the scheme. So, if the NAV of the scheme just before dividend payout is 50, it will fall to 40 after payment of Rs 10 as dividend. Considering an entry load of 2.25 %, this is what you can do,
By doing this, you can avail a tax exemption on Rs.59,775 by only investing Rs. 50,000!!
If you hadn’t cared about the timing of your investment, you would have anyway paid the entry load and the value of your investment immediately after the purchase would have been Rs. 48,675 at an NAV of 50. Yes, I know you have lost around Rs 220/- because you paid the entry load once on Rs. 50,000 and again on Rs.9775 but this of course is a small price to pay for what you would save by having an extra exemption of Rs 9775 without investing anything more.
You can achieve the same results by opting for the dividend reinvestment option of the scheme when you bought it initially saving you all these hassles. But again, by opting for the dividend payout option, you always have an ‘option’ to keep the money with you, tax free, if need be.
How’s that?
P.S. I owe this to my father, who had this thought first and then I validated with some spreadsheets.
5 comments:
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