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Normally people think about investment just one or two months before the new financial year.

They are concerned only about saving Tax they don’t bother about their investment. Generally
people thing that investments will give them good returns irrespective of the time of investment
but the fact is that if you invest without considering the market condition and other economic
situations the possibility of making loss is very high. Hence the amount you have saved by not
paying Tax might go in vain because of some bad investments. Many believe that two months into
the new financial year is perhaps too early to worry about tax planning. This belief can be
harmful, mainly for those planning to invest in Equity Linked Saving Schemes (ELSS) of Mutual

Since ELSS invests primarily in the equity markets, timing is very important for any investor. At a
time when equity markets are down, exposure can be made to these schemes to lower your holding
cost. Thus, an investor can put his money in these schemes even at the beginning of the financial
year if, in his opinion, the equity markets at that moment present a good investment opportunity.
ELSS offer tax rebate under Section 80C for an investment upto a maximum of Rs 1, 00,000.
These schemes usually invest at least 80 per cent of their corpus in equities and have a three-year
lock-in period. The unit holder is free to redeem his holdings once this lock-in period expires.


Following are the best ELSS on the basis of last 5 years performance:

Fund Name 6 months 1 Year 3 Year 5 Years From

Magnum Tax gain-G 63.81% 8.65% 14.38% 37.64% 19.16%
Sundaram BNP 58.07% 18.01% 21.22% 33.90% 22.54%
Paribas Tax saver-G
Canara Robeco Eqt 72.23% 30.14% 23.54% 30.60% 14.98%
Tax Saver-D
HDFC Tax saver-G 73.08% 19.11% 12.18% 30.54% 34.52%
Sahara Tax Gain-G 69.45% 24.19% 18.47% 27.56% 28.66%
Taurus Tax Shield-G 74.02% 13.85% 25.29% 27.64% 13.74%
ICICI Pru Tax Plan- 76.02% 8.30% 8.37% 27.37% 25.34%
Franklin India Tax 60.64% 14.99% 13.88% 24.74% 30.22%
HDFC LT 69.05% 11.55% 10.66% 23.97% 30.66%
Birla sunlife Tax 79.03% 11.68% 14.52% 21.85% 28.80%
Relief 96

Returns up to 1 year are absolute and over 1 year is annualized.

We feel that the current trend in the equity markets presents a good opportunity
for those intending to use ELSS for tax saving purposes because after the financial
crisis, now the market is in the way of growth. So this will help your investment
to grow faster. The first advantage of ELSS is that these carry a lock in of just
three years compared to a much higher lock in of other options like PPF, NSC,
etc. The situation turns even more attractive when the concerned ELS schemes
decide to distribute a dividend or bonus during the lock in period. Dividends
distributed and the units credited in the event of a bonus declaration are not
covered by the lock in clause. Therefore, in these schemes, an investor can get
back a portion of his money invested even during the time of lock in period.

One more advantage is that this ELSS investment comes with greater
transparency. Mutual Funds are, by law, required to disclose their portfolio to
their unit holders. Therefore it is easy for the investors to monitor how his
investment is performing. Most other tax saving alternatives carry a fixed rate of
return but ELSS carry an upside potential as they invest in equities, possibility of
making huge return is very high. It also offers the flexibility of investing regularly
in small amounts (SIP). This can be done through systematic investment plans of
these mutual fund schemes.

Advantages of ELSS

Following are the major benefits of ELSS.

1. Main advantage of ELSS is its short lock-in period, in NSC it is 6 years and in
PPF it is 15 years.
2. Since it is an equity linked scheme earning potential is very high.
3. Investor can opt for dividend option and get some gains during the lock-in period
4. Investor can opt for Systematic Investment Plan (SIP)
5. Some ELSS schemes also offer personal accident death cover insurance
6. Provides 20 to 40% returns compared to 8% in NSC and PPF

ELSS offers you the potential for superior returns with three major benefits. It
offers you Tax benefit under Section 80C. Since it is a long term investment it
gives a compounding effect to your returns. Finally your money is managed by a
professionally qualified Fund Manager, and it has an exposure across the capital
market. In normal Mutual Finds will have the advantage of compounding effect
and Fund Manager Service but you won’t get the tax benefit. So it makes ELSS
different from others kinds of investments.
Disadvantages of ELSS
However there are drawbacks too. One of the most important drawbacks of ELSS
Schemes is that there is no assurance of even any base level of returns. This is
because these funds are completely invested in the equity markets which, can
fluctuate to any extreme. On the other hand, the long-term investment horizon of
this fund does help in lowering the risk on this front. Following are the major
drawbacks of ELSS:

1. Risk factor is high compared to NSC and PPF

2. No assured return
3. Premature withdrawal is not allowed
4. Returns will change according to the stock market volatility

A smart investor can make maximum revenue out of ELSS by choosing the best
available plan in the market. While selecting one he should keep the following
parameters in mind.

· Scrutinize Past Performance:

· Choose the correct option:
· Potential to declare dividends & bonus:

Examine Past Performance: While past performance is no assurance that a

scheme will do well in the future, it is a good indicator of its future potential.

Choose the correct option: Many ELSS Schemes offer a choice between
dividend and growth options. Choosing the dividend option will make an investor
eligible to receive dividends from the scheme which, if declared during the lock in
Potential to declare Dividends & Bonus: For investors not very enthusiastic
to put in their money for a three year period it makes sense to choose a scheme
that can potentially declare a dividend or a bonus because this allow them to
withdraw the dividend/ bonus amount during the lock in period.

Tax Benefits under ELSS

As per Income Tax act 80c ELSS investment up to Rs 1, 00,000 are eligible for
deduction from the gross total income therefore reducing the total taxable income.

For example; If your total annual income is Rs. 4, 00,000 and you invest Rs
1,00,000 in ELSS then your taxable income will become Rs 3,00,000. As per new
budget if your income is 4,00,000 you have to pay 20% tax but if you are investing
in ELSS your taxable income will be Rs. 3,00,000 as a result you have to pay only
10% Tax.

Previously there was an upper limit for investing in tax saving instruments like
ELSS. Only individuals with less than 5, 00,000 annual income are allowed to
invest in tax saving instruments. But l now any individual can invest in ELSS
irrespective of their income level.

Systematic Investment Plan

One of the best ways to investing in ELSS is to save and invest on a regular basis.
A Systematic Investment Plan (SIP) in ELSS gives the best combination of
investments available to investors. It allows you to invest a fixed amount every
month. The minimum investment in an ELSS through the SIP can be as small as
Rs 500. With SIP investor can take advantage of fluctuations in the stock market.
So investor will get more units when the market is down and get fewer units
when the market is up. For instance if you are investing Rs 2000 every month and
you will get 100 units for when Net Asset Value (NAV) is Rs.20 and will get 50
units when NAV is 40. So investing a fixed sum regularly helps to cover the
market fluctuations by rupee costs averaging. Most of the Asset Management
Companies (AMC) charges less entry load for SIP compared to normal purchase.

One can hope to receive superior returns from ELSS in comparison with others
investments. Other options like EPF, PPF, five-year FD, etc. offers fixed rate of
return (currently around 8%), whereas ELSSs can give you nearly 15%. One year,
stocks may be down 50%, but over a period of 3-5 years you can hope to get an
average return of 15%. This is because historical data shows that stocks have the
potential to outperform all other asset class in the long run. ELSSs also beat other
equity MF schemes, as they have a compulsory 3-year lock-in period.
The returns from ELSS before the fall of the stock markets were greater than any
other tax saving option. ELSS is the best option for investors who are looking
with an investment horizon of 3-5 years. The short term weakness in the market
will glide down and will earn the investor with better returns in the long run. The
performance and the ability of the stocks in the long run can never be beaten with
any other financial instruments. So ELSS will be the best option for you to invest
with tax benefit.


Kirang Gandhi
Corporate Financial Planner