Invest in ELSS before the sun sets with DTC

It’s that time of the year when most of us would have started our investment planning for the year to save taxes. Probably, we all would have got deadline from our employers to submit investment proof for tax purposes. Whatever the reasons, it’s time to act again. So what all we have to save our taxes this year?

Equity Linked Saving Schemes (ELSS), a tax saving mutual funds is an option for you. Part of Sec 80C limit to the extent of Rs 1 lakh, an ELSS is similar to diversified equity funds units, with the only difference being the added tax benefit. Also, one can invest in an ELSS with as little as Rs 500, unlike the other equity oriented funds, which generally demand Rs 5,000 as the minimum investment amount.

Now why it make sense to take ELSS for saving your taxes. Firstly, ELSS is only tax saving vehicle having substantial equity exposure and hence potential to earn higher returns. The National Pension Scheme (NPS) offers an option to invest up to 50 per cent of your annual contribution in equities, but still lower than ELSS. Secondly, ELSS comes with the shortest lock-in among all aforesaid tax-saving instruments, just 3 years of lock-in. Finally, it’s your last chance to take equity exposure while enjoying the tax benefits as Direct Tax Code (DTC), which proposes to take tax benefit away from ELSS, is all set to get implemented from April 2012.

Right ELSS for you

Once you decide to buy ELSS, there are some points to ponder over. First is of course about returns. Ideally, one should assess the ELSS performance over a 3 year time frame at least, as this would enable you to judge whether they have created wealth for you post the lock-in period. Then there are other things skins to mutual funds investing including the expense ratio of mutual funds scheme, its portfolio, whether it’s biased toward one particular sector or script, the fund manager’s past track record, whether the fund managed by her/him has delivered returns to investors. Further, like any other mutual funds, ELSS provides an investor three options including growth, dividend payout and dividend reinvestment option. While growth option is the ideal one to allow compounding benefits to build up substantial wealth over time, the dividend option allow the investors to earn tax-free dividends periodically. Dividend option in ELSS makes it the only investment option that gives benefit of interim cash flow even in its lock-in period. However, investors must avoid dividend reinvestment option, simply because you get locked in forever. Dividends get reinvested and locked in for 3 years and it gets into a cycle.

The Final Word

So, while ELSS schemes offer good opportunities for long-term wealth creation, it’s imperative that you complement your financial planning exercise with your tax-saving by considering the aforementioned aspects of age, income, risk appetite and financial goals as this would enable in making a prudent investment decision. Moreover, please do not wait till the eleventh hour as this may lead you to making a wrong choice.

Source: http://www.indianexpress.com/news/Invest-in-ELSS-before-the-sun-sets-with-DTC/884024/