We saw that mutual funds are really a great way to invest in the stock market (through the Equity Diversified Schemes). But there is one more wonderful thing. You can save on tax as well as you invest in the funds. What more can you ask? The ELSS (Equity Linked Saving Scheme) are Equity Diversified Schemes that offer you tax benefits similar to PPF or your Insurance policies. So get ready for the ride.
This category (tax saving funds) is by no means performing any less than the others. So where is the catch? It is in the liquidity. You are locked in for 3 yrs. So you are eligible to sell the units only after 3 yrs. But the good thing is that since you are dealing with equity (shares), experts suggest that it works out in your favour if you stay invested for minimum 3-5 yrs. So the lock-in is no more than a boon to you as you will not be able to withdraw and it works in your favour.
The returns from these funds are quite good (Since there is a 3 yr lock-in the fund manager is also able to better invest the money without any tension that it might be withdrawn prematurely). Some are phenominal and in the range of 40%. The leaders are “HDFC Long Term Advantage Fund”and “Prudential ICICI Tax Plan” followed by State Bank of India’s “Magnum Tax Gain” and a lot of others. In the last year alone “Magnum Taxgain” gave an astounding return of 140% !!!!! and what more, if you consider the tax benefit of 30% you end of getting 170% return on the whole (This is a specific case and is not likely to happen again. But this shows the capability of shares to give great returns). To put it simply. can you guess how many years it would have taken to get the such a return in PPF (8%) or Insurance (4-7%) . Atleast a cool 15 years !! and that is why I am insisting that part of your investment (portfolio) should go into mutual funds (Of course you must know the current staus of the market and the returns before doing so).
ELSS gives you 30% tax advantage, so when you invest 10000 in such a fund, it means you have already got back 3000 Rs as profit and the rest is just an addition. Cool Isnt it. Your ELSS contribution will be taken in the 1,00,000 limit (Section 80C) and will compete with your PF, PPF, Insurance and Pension contributions to get a place in the 1,00,000. But don’t you feel they deserve a place……