Who wouldn't love to earn money without investing any? Practically, the feat is impossible but it is possible to create a strategy for perpetual income with minimum investment. Although wealth generation depends on your risk factor, rolling over of funds has been proved to generate maximum benefits for investors.

How do roll-overs work?

In the world of investing, rollover refers to re-investing the funds from a mature holding into the same or similar holdings.Auto-renewal is the most commonly used term for rollovers. Funds are usually rolled over to save taxes, lock interest rates etc. An example of rollover is auto renewal in FDs.

Rollovers in Tax saving mutual funds:

Let us assume that you have started an investment in Equity Growth fund. Your investment happens as follows:

April, 2007 – ₹100000

April, 2008 – ₹100000

April, 2009 – ₹100000

From the respective investment dates, each installment will be locked for 3 years. Let us assume that you are in the highest tax bracket (30%). Every year, you have applied for IT returns and claimed deductions.

Now in 2010, the first installment you made in 2007 is free. In April 2007, the NAV value of the units you purchased was ₹22.32 while in April 2010, the NAV is ₹40.95. Now, you decide to rollover your investments by redeeming only the required number of units and reinvesting it as your 2010 installment. This means, you are using your 2007 installment as your tax saving investment in 2010. In 2011, your 2008 installment is free and you also have some unredeemed 2007 units. You can redeem the required number of units at the current NAV and reinvest them again in 2011.

This process can go on unless a severe bear market occurs and you lose 3 or 4 years of gains.

The remarkable fact about this strategy is that only the first 3 payments (highlighted) were the actual cash-flow. The rest of the SIPs were made from reinvesting or rolling over your capital gains.The 5587 units that are free but not redeemed are highly liquid and can be liquefied anytime.

From 2015, the limit in Section 80C was increased from ₹100000 to ₹150000, hence the increase in investment from 2015. But this extra ₹50000 need not be funded from your savings. Rather, the capital gains from your existing funds can fund the additional amount.

Why is ELSS ideal for rolling over?

Rolling over works for any investment mentioned under 80C but ELSS is suited better than others.

• Initial investment can be low as ₹500 – this is the lowest compared to other forms.
• ELSS has the lowest lock in period: 3 years
• Returns earned in ELSS are completely tax free so there is no prevalence of taxation when you reinvest the capital gains.
• Tax saving ELSS funds gives you the maximum returns by power of compounding and also because of higher asset returns.

On a note of conclusion,

Depending on personal financial circumstances and preferences, rolling over may yield good benefits for investors. The strategy can be applied after a brief discussion with your financial advisers.