There are many tax-saving instruments like NSC, PPF that have a fixed maturity period and give fixed returns on the amount invested. Conversely, ELSS is an equity linked tax-saving investment instrument. Under section 80 c of the income tax act, investments up to INR 100,000 are eligible for deduction from gross total income and the investments in ELSS which qualify under Sec 80 C upto INR 1,00,000 can be deducted from the total income, hence reducing your total taxable income. If you are not risk averse, ELSS funds could be the best tax saving tool for you. The 5-year compounded annual growth rate (CAGR) of the category has been 39.11 per cent (as of June 2008), far better than any other tax saving instrument.
Both ELSS and diversified equity schemes have the same risk profile. They are high
risk - high return investment avenues. The major difference is in terms of the mandatory lock-in period of three years applicable to ELSS.
Your rational mind can raise a doubt …How does the lock-in add value? Does it not make ELSS an illiquid option?
Remember it is always advisable for investments in equity linked instruments to be for the long term, as it is only over this time frame that equities have the potential to unlock value and outperform other comparable assets. The lock-in period fixed for ELSS supports this view and also allows the fund manager to plan a strategy that will be beneficial in the long-term. The longer horizons in the equity investments smooth en out adverse market movements and provide the advantage of rupee cost averaging. Moreover it is impossible to time the market and thereby earn superior profits in lesser time frame.
Please remember that whenever it comes to investing in mutual funds (be it for tax saving or otherwise) you should stick to open-ended funds which have proven their worth in the past. You can trust the older funds as you can assess their past performance in various market cycles and compare it with peers. Though past returns are not indicative of future returns, it would still be a better strategy to opt for experienced funds rather than new ones. As you venture into funds, make sure you adopt the systematic approach to investments and opt for a SIP (systematic investment plan). The basis of allotment of NAV is based in the cut off time set by each fund house. Most mutual funds have set their cut off time at 3pm. This implies that all applications submitted before 3 p.m. on a particular working day are allotted units according to that day's NAV (declared late in the evening).
To sum up, the benefits of investing in ELSS over other tax-saving instruments:
• Investments in ELSS enable an investor to claim deductions under section 80C
up to Rs 100,000 from your gross taxable income.
• Since this is an equity-linked scheme, the earning potential is very high (although at a higher risk) as compared to other tax-saving instruments. The Systematic Investment Plan (SIP) is an effective way of investing in ELSS as the concept of rupee cost averaging and the power of compounding work well.
• The lock-in period is the shortest, three years, as compared to other tax saving instruments. The maturity period for NSC and PPF is six years and 15 years respectively.
• According to current tax laws, long-term capital gains on investment in equity oriented funds and the dividends received on these investments are tax-free under section 10(38) and section 10(35) respectively in the hands of the investor.
Your investment strategy can be as follows:
1. Your risk appetite should at all times determine the total investments in tax-saving funds. Don't go overboard in the segment simply because of the opportunity to rake in impressive returns, thereby ignoring the risk involved.
2. Use the SIP route for investing in tax-saving funds. Not only does it do away with the need for timing markets, but it also reduces the strain on your wallet at the end of the financial year when most investors conduct their tax-planning exercise.
To conclude let me provide you with the list of the top performing ELSS funds over a 3 year time period as of 08 July, 2008:
Birla Sun Life Tax Relief 96 19.20%
Canara Robeco Equity Tax Saver 21.95%
Escorts Tax Plan 23.57%
Franklin India Index Tax 21.48%
Franklin India Taxshield 18.12%
Magnum Taxgain 23.41%
Principal Personal Tax Saver 22.78%
Principal Tax Savings 23.16%
Sahara Tax Gain 19.57%
Sundaram BNP Paribas Taxsaver 26.49%
Some good equity tax saving funds which you can chose to invest in are SBI Magnum Tax Gain, Birla Sunlife Tax Relief 96, Sundaram BNP Paribas Tax Saver or Franklin India Tax Shield.
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www.invest-insight.blogspot.com
Disclaimer: The author of this page is not a registered financial advisor, and you should not construe anything written here to be investment advise. You should consult a qualified broker or other financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. No representation is being made that any investment made on the basis of data or information on this blog will result in profits. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.
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