Apr 23, 2013 05:43 PM IST | Source:

Last minute tax planning? Go for ELSS

Time must have come for employees to submit the proof of investments to HR for tax benefit claims.

Time must have come for employees to submit the proof of investments to HR for tax benefit claims.

In case you have not completed the full quota of Rs 1,00,000 under 80C, go for ELSS.

What is equity linked savings scheme (ELSS)?

An equity linked savings scheme (ELSS) is very similar to a diversified fund - it invests in the broad Indian equity market. It has no stated preference for sectors or themes – it chooses stocks based on the fund manager’s research and hypotheses. Thus, the stock market indices such as Nifty and Sensex are good benchmarks to compare a diversified fund against.

An ELSS has a three-year lock-in period.

Check out performance of ELSS

Advantages of an ELSS

An ELSS being identical to diversified mutual funds enjoys the same advantages - the general advantages of equities and equity funds (that they yield superior returns over other asset classes in the long term and that they outsource your research work of identifying stocks) apply to ELSS too.

As a tax-saving instrument, an ELSS wins hands down over unit linked and traditional insurance plans since it has far lower costs and charges loaded onto it. Also, a tax-saving instrument is meant for saving for the long term. In long term savings, equity wins comfortably over debt in terms of returns. Thus, ELSS scores over PPF, Provident Fund and 5-year fixed deposits in this regard. This makes it one of the best tax saving instruments available.

Limitations of ELSS

For the purpose of tax savings, there is virtually no limitation of an ELSS. It beats all other tax saving instruments in terms of returns.

How do I choose my ELSS?

Choosing an ELSS is fairly easy, similar to choosing a diversified mutual fund.

But let’s first look at how NOT to choose an ELSS. Do not try and time the market while choosing a fund. "Is this the correct time to invest" - is a wrong question to ask. The best way is to spread your ELSS investment through the entire financial year - through 12 systematic investments. However since you are running late on this you may choose to invest in lump sum.

Here's how to choose (the rule of three):

  • Avoid funds that have less than three years of track record.
  • Avoid funds that have an asset base of less than Rs.300 crore. You can get this figure in the fund fact-sheet (available for download at the fund's site)
  • Rank all ELSS in decreasing order of three-year returns. Choose one of the top three. To be sure, past performance may not be repeated in future. Yet, this is the best guide you have – far better than agents peddling their vested interests and half-cooked analysis as 'research'
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