Thursday, January 25, 2018

Simulation: Disciplined savings in ELSS - Dividend payout options

This blog is a simulation through excel chart; which shows how a disciplined investment towards ELSS for 80C benefits with a dividend payout option will lead to a passive income for the investor. 10th year onward he will have enough earning through his dividends to save for 80C obligatory investments. This blog attempts to underline the significance of Dividend options in tax saving mutual funds. 

We have considered following conditions in this simulation:-

1. Investment of  ₹100,000 towards ELSS every year. (80C limit is ₹150,000; but 1 lakh is taken into account considering contributions towards term insurance, EPF, etc)
2. Every year ₹100,000 contribution is made irrespective of the fact that units will be available for redemption after completion of lock-in period of 3 years.
3. Compounded annual growth rate of the fund is 12% p.a.
4. Mutual fund units are bought in first week of April every year.
5. Dividend payout by Mutual fund direct plan is at 10% in the last week of March every year.
6. Assuming existing rules of 80C remains unchanged for next 10 years as well.

If a person saves ₹100,000 towards ELSS - Direct Plan and Dividend payout option, assuming in one year his investment will grow by 12%. This fund will be valued ₹112,000. The fund house will payout a dividend of 10% which will be around ₹11,200 Hence, post dividend worth of the fund will be ₹100,800. 

Even tough his investment is blocked for 3 years in tax saving fund, he has freed up a liquidity of 11 thousands. This money can be utilized towards 80C obligations for next year. Hence, next year he will be required to arrange only 89 thousands, which with 11 thousand dividend will help him meet 80C requirements. At the end of this year he will have 20% 80C earned through dividends. If this process is sustained for 10 years, he will not be required to fund 80C from his salary. Dividends will take care of his 80C.

Considering the growth equity market has witnessed in past 10 years, returns from ELSS will be much more than what is shown in this conservative estimate. In case of any lean year when market will under perform the subscriber of this process will have more units accumulate to his portfolio. When market will bounce back dividends earnings will be higher as well. Thus, the 100% funding of ELSS target may be achieved prior to completion of 10 years if not more.
Besides the regular dividend payout the investor will eventually build up a promising equity mutual fund portfolio.

What if share market under performs?

When markets under perform fund houses reduce the amount of dividend payout. This is in interest of investors, since the fund house can use this money to buy quality stocks available at discount. Once the market revives these stocks appreciate and hence fund value increases accordingly. With enhances fund value mutual funds now give higher dividends to their subscribers. 

वित्त विशेष 

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