The good, bad and ugly of ELSS recycling

What is Recycling of ELSS?

From newspapers to cardboards to plastic and glass jars and bottles to cans can be recycled and is a good idea from the overall perspective, but what is recycling of ELSS?

ELSS or Equity Linked Saving Scheme is a tax saving mutual fund usually in a diversified equity fund with a mandatory lock-in period of 80C for 3 years. Recycling of this would mean, redeeming the funds every 3 years and then reinvesting the same again in the same fund so as to get additional tax benefit for that particular year!

So, basically if you have an ELSS investment which has completed its 3-year tenure for a lumpsum investment, all you need to do is sell its units and then repurchase the same at a higher price, assuming markets have performed well in the last 3 years and so NAV has gone up, only to avail 80C benefits for this year as well!

Is Repurchase worth the effort?

Before we get into an understanding, let us understand the entire fundamentals with an example. Suppose, you had purchased 1000 units of ELSS at Rs 100 NAV in 2010 for Rs 1 lakh and the NAV goes upto to Rs 125 in 3 years’ time. So, when you wish to redeem, you will receive Rs 1.25 lakhs for Rs 1 lakh of investment.

Now, between your redemption and repurchase, if the NAV movement is by another Rs 3, then your calculations look like:

Initial Purchase of 1000 units @ Rs 100 NAV	Rs 1,00,000
Redemption of 1000 units @ Rs 125 NAV	Rs 1,25,000
Repurchase of units @ 128 NAV for Rs 1.25 lakhs	976.56 Units
Loss in the interim period	Rs 1.28 lakhs – 1.25 lakhs= Rs 3000

This is due to the NAV movement between the interim time lag between redemption and repurchase of units, which could have been more or even less. The notional loss is not the basic reason why reason WHY recycling of not-so-good as an overall concept.

The Good

The good part about recycling is you do not need to worry about accumulating fresh money every year for your 80C. If you can invest Rs 1.5 lakhs every year for a period of 3 years, you are home. You can then keep recycling your ELSS every year for the amount invested 3 years’ ago and then reinvest the same to avail additional 80C benefits for the present year!

The Bad

The bad part possibly is the loss of return between the redemption and the repurchase and the notional loss for the same. However, it is not such a big menace as the markets might just remain stagnant in between the 4 to 5 day period.

For a systematic investment, the process is not that simple. After 3 years, you would then have to systematically redeem and then again systematically repurchase, which might not be as easy as it sounds!

Also, after the 3 year period, if the markets are down, then redeeming might not be a good enough option.

The Ugly

The worst part about recycling your ELSS is the basic purpose of investment! Why does one invest? To save taxes alone? If that answer is yes, then perhaps recycling of ELSS is good concept for you.

But if you are amongst those who invest to build a healthy portfolio for the future, tax saving should just be a by-product and not the basic reason for investing. So, the entire focus is to keep adding to your portfolio at least Rs 1.5 lakhs every year, so that your overall portfolio become more than 4CR in a period of 25 years at an average CAGR of 15%!

Also, recycling of ELSS can have a negative impact on your overall financial portfolio for 2 reasons:

1. You are not reaping the benefits of the power of compounding, because you are truncating the tree every 3^rd year before it grows
2. You are not working on building your portfolio which might have a negative impact on your post retired life! Over the longer run, it would hit your investment and savings rates and your lifestyle as well.

Our take:

Ideally investment of Rs 12500 every month or Rs 1.5 lakhs a year should be availed. Other 80C investment avenues like EPF, insurance premiums, etc. can also be availed for mandatory 80C investments rather than recycling of ELSS.

Thus, recycling of ELSS should only be used in a particular year when you are too broke to invest fresh funds and avail this is a back-up plan but not as a rule. This strategy could be used only as an exception else it works as a slow poison to your own financial future!

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