ELSS Best of both the worlds

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The New Year brings with it more work and diligence, especially in the area of tax planning. And it's that time of the year when you have to be innovative with your investments to save tax. Instead of opting for the conventional tax-saving instruments like PPF, NSC, RBI bonds, and LIC policies, a better and remunerative way of investing your hard-earned money is the ELSS. An Equity Linked Savings Scheme (ELSS) is a tax saving instrument provided by mutual funds. It offers the benefits of getting equity linked returns and with the additional benefit of tax saving. Here is an analysis of the nitty-gritty involved in an ELSS, which would give you a perspective as to why it is a better alternative to other tax-saving instruments.

The fundamentals

An ELSS has a lock-in period of three years, which entails a minimum investment of Rs 5,000. The investor gets tax benefit by investing in ELSS, reducing his burden to a large extent. In addition to this, the investor earns capital appreciation over a period of three years. After three years, it can be redeemed or may be continued. The same three-year lock-in is available in close-ended schemes also but there is no tax benefit as the investor can exit the scheme any time but there is a higher exit load. In case of ELSS, you can't remove the money in less three years of your investment period irrespective of how much return the scheme has generated.

According to your risk appetite there are three options available to choose from: growth, dividend and dividend reinvestment. Some investors are very risk averse. They want a regular flow of funds to maintain confidence on that particular scheme. This type of investor may go in for dividend. Dividend is declared depending upon the fund house. Dividend is generally declared at least once in a year. The percentage of dividend is based on the growth achieved by the scheme in less time. But he should understand that the increase in the NAV of the dividend option would be relatively slower than the growth option as there is cash outflow at regular intervals. And it reduces the chances of higher compounded growth over a longer period.