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You can also opt for a Dividend Payout option, thereby realizing
some potential gain during the lock-in period.#
You can invest through a Systematic Investment Plan and bring
discipline to your tax planning
Similar to other equity funds, ELSS funds have both dividend and
growth options. Investors get a lump sum on the expiry of 3 years
in growth schemes.
On the other hand, in a dividend scheme, investors get a regular
dividend income, whenever dividend is declared by the fund, even
during the lock-in period.
For tax purposes, returns from an ELSS scheme are tax free. You
can claim upto Rs. 1 lakh of your ELSS investment as a deduction
from your gross total income in a financial year under Sec 80C of
the Income Tax Act.
Key points to remember
A Equity linked savings schemes is a type of mutual fund with 3
years lock in period and tax benefits attached,
B - There are three types of options in ELSS, dividend option
growth option and dividend reinvestment option.
C Tax benefits on investment in ELSS may soon be phased out
with the introduction of direct tax code.
c)
Sharpe ratio Sharpe ratio is used to calculate risk factor
of the funds portfolio. Sharpe ratio of the fund should be near 1.
Particulars
PPF
Tenure
15 years
Returns
Minimum
Investment
Maximum
8.70 % *
(Compounded
Annually)
NSC
6 years
ELSS
3 years
Returns /
8.50 to 8.80 %
Dividends are
*
Market
(Compounded
linked and not
half-yearly)
assured
Rs.500
Rs.100
Rs.500
Rs.150,000
No limit^
No limit^
Investment
Amount
eligible for
Rs.150,000
deduction u/s
80C
Taxation for
interest
Safety/ Risk
Tax free
Rs.150,000
Rs.150,000
Dividends and
Taxable
capital gain
tax free
Highest Safety High Risk
Highest Safety
15 Years - Partial
Lock-in Period Withdrawal after 6 6 Years
years is permitted
3 years
means you must select the fund after proper research. Instead of
picking a fund with high, but volatile, returns, choose one with a
stable performance record.
What's the lock-in period?
The lock-in period is only three years, the shortest among all taxsaving options under Section 80C. You cannot redeem or switch
to another option during this period. In the case of SIPs, each
instalment is treated as a separate investment and will have a
three-year lock-in period. So, if you started investing in an ELSS
fund in April 2010, you can redeem the units bought in the first
instalment only in April this year.
Those bought in May 2010 will be open for redemption only in
May. The lock-in stipulation does not mean that the investor must
compulsorily redeem the funds after three years. Unlike Ulips and
pension plans, there is no maturity date of an ELSS fund. If you
want, you can remain invested for a longer period. 4) Dividend,
growth or reinvestment?
The dividend is only a profit-booking exercise since a fund's NAV
reduces by the amount the investor receives as dividend. In the
growth option, the amount remains invested for the entire tenure.
the fund managers do well in the coming years. Selecting the right
scheme is crucial since there is significant variation in the returns
of different schemes.
Though past performance is an important parameter, also take
into account the track record of the fund house and fund manager.
Once you select a scheme, decide whether you want to go for the
dividend or growth option. There is no difference in the tax
treatment of the two options. The decision should be based on the
cash-flow requirements of the investor. If you opt for the dividend
option of the fund, you might get some portion of the money back
within 1-2 months. Dividends from mutual funds are tax-free so
there is no tax liability as well. Avoid the dividend reinvestment
option for ELSS schemes because the lock-in period will prevent
you from exiting fully.
Though the ELSS funds invest in equities, they are different from
other open-ended diversified equity funds. Due to the lock-in
period, the ELSS fund manager does not have to worry about
redemption pressure from investors. This gives him the freedom to
invest in shares as per his conviction and hold them for longer
periods.
In the past few years, the ELSS category has consistently
outperformed the large and midcap sub-category of diversified
equity funds (see graphic).