It’s the tax saving season and the market is flooded with different types of tax saving products. The hottest among them are infrastructure bonds, long-term fixed deposit schemes, NSC, and PPFs. There are lots of bonds available in the market and many more will hit the market till March-end.
These products do not provide above average returns to investors. Obtaining returns above the prevailing inflation rate is a difficult proposition with these investments. In infrastructure bonds you get tax exemption on an initial investment of Rs 20,000. So investment beyond this amount is not recommended. With options like fixed deposit, NSC and PPF, the liquidity factor comes into picture as the lock-in period is very high.
The above instruments are pure saving instruments and should only be seen in that light and not in terms of capital appreciation. So are there better tax saving instruments available in the market, which also provide the opportunity for capital appreciation? ELSS – Equity Linked Saving Scheme could just fit the bill as it can provide both tax savings and has the potential for capital appreciation. Of course the perquisites for considering this investment are a healthy risk appetite and a logical approach to equities.
ELSS are equity-oriented mutual fund schemes with an added advantage of tax saving under different sections of the Income-Tax Act. Asset allocation is tilted towards equities without default. These schemes follow the theme of mutual funds but investments up to Rs 1 lakh in ELSS funds are eligible for deduction from taxable income.
Features
* These are equity oriented mutual fund schemes
* Multiple ways of investment (lump sum/using SIP mode)
* Asset allocation towa-rds equities can be in the range of 80 to 100 per cent
* As the allocation is biased towards high risk high return assets like equity, the main objective of such funds is capital appreciation
* Lock-in period of 3 years
* Tax exemption under Section 80C up to Rs 1,00,000
Caution points
n Lock-in period of 3 years makes it illiquid in initial years.
n Returns on ELSS are not fixed and is entirely dependent on stock market performance.
Investment
rationale
Although ELSS has a lock-in period of three years it’s advisable to invest in this scheme as the lock-in period is comparatively smaller than other tax saving schemes. The performance of ELSS is linked to the market and it might sound risky to conservative investors, but the lock-in period of three years comes to their rescue. It’s a known fact that in the long-term equity investments yield optimum returns. So if you keep your money parked for three years and preferably more, there is a good chance that you will reap good returns subject of course to market conditions! Taking direct exposure in equity is not recommended if you do not have enough time for research.
These funds are managed by fund managers. The other feature which makes ELSS more attractive is the multiple ways of taking exposure. Although it’s recommended to take a lump sum exposure so as to keep the lock-in period fixed, you can also invest via the SIP route. In case of SIP your lock-in period of three years is counted from the date of investment. There are a lot of funds and there is enough data regarding them using which you can judge the performance. Post analysis you can choose one of the best managed funds.