ELSS Best of both the worlds

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Mutual funds have given excellent returns in this bull-run since 2003 and tax saving schemes were also on the same track. Currently, there are 29 tax saving schemes in the market. Some schemes have performed well above the expectations and delivered outstanding returns in the last one, three and five years.

It is advisable to invest in a fund where there is a three year or more of track record to stand for. However, many investors are enticed by short-term return gains and often what their advisor pushes. Remember, some of the advisors gain commission from selling these products and are often known to recommend products that might not be suitable for you. And this applies to most other funds as well.

To select the right performance oriented fund requires data mining and in-depth research on the companies to find whether they provide good returns in the long run. Often, ELSS funds don't churn their portfolio frequently as compared to open-ended non-ELSS schemes, where it is common due to liquidity pressure, hence it is paramount to look at their equity holdings with attention.

There are some schemes like the Taurus Libra Tax Shield and Principal Tax Saver, which have delivered 111% and 86% returns respectively in the last one year. If one looks at least a three-year track record, tax savings instruments have provided an average return of 46.44%.

Though, past performance may not be reflected in the future, the economic scenario in India looks strong and the markets are expected to outperform other forms of financial investments. Hence, ELSS will continue to remain a smart place to invest in.

Now, even after the three years of lock-in, you could redeem your current holdings and reinvest to avail of the tax benefit for that financial year. In this case, your investment will be continued at the current NAV price.

The other aspect

Like every good thing, there are caveats here as well. Some mutual funds claim to have declared dividend of 200% or more, urging you to invest with them within a record date to receive a specified dividend. When you come across such claims, proceed with caution.