The tax saver advantage

The ELSS Benefit • Shortest lock-in among all tax saving 80C options •  Highest returns in the past five years • Lowest entry load for any equity-linked product • Greatest flexibility and ease of investment • Tax free profits and dividends

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Forget the volatility in the stocks markets for a minute. Better still, forget it for three years. When you invest in tax planning mutual funds—also known as equity-linked savings schemes (ELSS)—you do exactly that. Investments in these funds cannot be withdrawn before three years so investors need not get bothered by the daily ups and downs of the market.

That’s not such a bad thing. Most probably, when you check your investments three years from now, you would have done fairly well. According to a study, if you remained invested in Sensex shares for any block of three years during the past 27 years, your average annual return would have been 26.95%. The ELSS’ potential to create long-term wealth has not escaped taxpayers’ notice. Ever since Section 80C removed the sub-limit of Rs 10,000 a year on tax saving funds three years ago, the category has grown exponentially.

From 18 funds managing about Rs 900 crore of funds in January 2005, it has grown to 29 tax saving funds managing over Rs 14,500 crore today. The only other tax saving option that has grown at such a scorching pace is insurance. There too, the growth has largely come from Ulips—which is more of a mutual fund than an insurance plan.

As a tax saving tool, ELSS funds have several advantages (see box The ELSS Benefit) over other Section 80C options. An investor in bank fixed deposits and NSCs locks up his money for 5-6 years and has to pay tax on the interest earned. But ELSS investments can be withdrawn after three years and there is no tax on profits. If you reinvest in the ELSS fund, you get tax exemption twice in six years compared to just once in case of NSCs and fixed deposits.

And we have not even factored in that ELSS could give substantially higher returns. However, ELSS funds invest in stocks and carry the same risk as any equity fund. The best way to invest in them is in monthly instalments called SIPs. They even out the ups and downs by averaging your cost of purchase over the long term.

You can barely squeeze in two instalments before 31 March. For instance, if you are planning to invest Rs 20,000 in ELSS funds for Section 80C benefits, invest Rs 10,000 right away and another Rs 10,000 a month later, just before the end of the financial year. You have decided on investing in ELSS funds.

You have even chalked out your mode of investment. Now comes the tricky part—choosing the best fund. Investments in PPF, NSCs or fixed deposits don’t require too much thinking. Only in case of an insurance policy or a pension plan do you need to weigh the choices before you. Ditto for ELSS funds, where your choice of fund is crucial because you can’t rectify the mistake for three years. MONEY TODAY and Value Research zeroed in on the six best tax planning funds for you.

These funds have not been chosen on the basis of their performance alone but also their risk profile, the consistency of returns, their investment style and quality of holdings. But this is not a ranking. All six funds are good investments. Which one should you invest in depends on what kind of investor you are. We have broadly put them into three categories—stable and safe, fast-track growth and turbo aggression. Take your pick.