It’s that time of the year again when you try to find the right instrument to invest in to be able to save taxes while ensuring capital appreciation. An easy way to save the tax out-go is through Section 80C of the Income-Tax Act, as it allows an exemption of Rs 1.5 lakh.
While there are investment options such as PPF, NSC, tax-saving fixed deposits, ULIPs, etc., covered under Section 80C, equity-linked saving scheme (ELSS) mutual funds have proven to be one of the best ways to grow wealth and save taxes optimally. Let’s take a ringside view of what ELSS funds are, their merits and demerits, and how they can be compared to other investment options.
How to invest in ELSS
There are two ways of investing in ELSS. You can either make a one-time investment in an ELSS scheme or take an SIP route in which an amount as small as Rs 500 can be invested each month.
The SIP option reduces volatility and increases discipline in tax planning. Keep in mind that each month’s SIP investment comes out of its lock-in only three years after the investment date. For example, your January 2017 ELSS SIP amount can be redeemed in January 2017, your February 2017 investment in February 2020, and so on. For optimal returns, it is advisable to invest for the long-term.
The points to be kept in mind while investing in ELSS funds are the funds’ portfolio, pedigree of the fund manager, volatility of the fund in the past and the expense ratio of the fund.
What are ELSS funds?
ELSS funds are a type of diversified equity mutual fund with the largest part of the money invested in equity, thus fetching higher returns when the stock market goes northwards. However, the caveat or risk associated with equity instruments are involved in ELSS too.
ELSS have both dividend and growth options, similar to other equity investment instruments. In the dividend option, an investor is entitled to get regular dividend incomes whenever dividends are declared by the fund, even during the lock-in period. The growth schemes give the investor a lump sum on the expiry of three years, which is the lock-in period for ELSS funds.
Some popular ELSS funds are Franklin India Taxshield, Axis Long Term Equity Fund, Birla Sun Life Tax Plan, ICICI Pru LT EF, and BNP Paribas LT EF.
As per the CRISIL-AMFI ELSS Fund Performance Index in December 2016, the ELSS fund category has generated annual returns of 3.35 per cent in the last year, 16.64 per cent in the preceding three years, 17.71 per cent in five years, and 10.61 per cent in 10 years.
