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Tax saving along with reasonable returns

Masoom Gupte  |  Mumbai 

During this time of the year, taxpayers find themselves flooded with mails and goading them to invest in instruments. Both insurance companies and mutual funds pitch their life/medical policies or equity-linked saving schemes (ELSS).

Investing in ELSS, however, might soon be passé. If the is implemented next year in its present form, this year would be the penultimate year in which you will get benefits from investing in under

A mutual fund scheme has to invest at least 65 per cent of its corpus in equities to get benefits under comes with a mandatory lock-in of three years.

But, this period is much lesser than that of other instruments such as the of 15 years (six years for partial withdrawal), (six years) and unit-linked insurance plans (Ulips) of five years. Over a three-year period, returned 1.30 per cent as against equity diversified funds’ 1.27 per cent.

Besides the benefit in the first year, returns from these schemes have been quite good. According to mutual fund tracking agency Value Research, the ELSS category has returned 13.07 per cent annually, as compared to equity diversified funds’ 12.48 per cent, as on January 25 this year.

Financial experts feel the main advantage of investing in ELSS is that it ensures forced investment in equities. “ELSS gives the dual benefit of saving and equity investment,” says Nirav Panchmatia, founder and director, AUM Financial Advisors. However, the allocation to ELSS should be decided only after calculating the amount spent for purchasing a term insurance and contribution made towards the Employee Provident Fund, says Govind Pathak, director, Acorn Investment Advisory Services. It is because if one has already exhausted the limit by investing in these instruments, an equity-diversified fund can be a better option because of its liquidity — one can enter or exit the scheme when one wants.

Like any equity scheme, ELSS offers both dividend and growth options. The growth option gives better returns as the interest income gets reinvested and compounded. Those in need of cash or pensioners should opt for the regular payouts or dividend option.

The interest income is tax-free because you hold the units for over a year. But you have to pay the securities transaction of 0.25 per cent at the time of maturity.

It is advised to invest a lump sum in ELSS. “A systematic investment plan (SIP) works only if the benefits are to continue in the next financial year,” says Pathak. Also, if you are already late, starting an will not make much sense. Opt for an in ELSS from the start of the financial year, if you want to have a disciplined approach.

However, the lock-in period can be a deterrent, according to many financial planners. “Equities can be volatile. And, if the fund value erodes over three years, you cannot do anything,” feels Gaurav Mashruwala, a certified financial planner. A three-year period may not be sufficient for your equity investments to appreciate significantly either, he adds.

First Published: Tue, February 01 2011. 00:39 IST
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