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Here's all about Equity linked savings scheme, the various investment avenues available and the advantages. Some tips for investing in this scheme are enumerated.

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Equity Linked Savings Scheme (ELSS)

Among various avenues of investments in capital market mutual funds are prominent investment options for investors across the globe. There are different types of mutual funds prevailing in the market which broadly can be classified into Equity, Debt and Balanced mutual fund. A mutual fund with certain terms and conditions like lock in period, income tax benefits etc. is known as ELSS or equity linked savings scheme.
 
What is ELSS?
1. Introduction to ELSS
ELSS is a type of mutual fund. Going by its name ELSS invests a majority of its corpus in equity and equity related products. An investment in ELSS comes with a lock in period and has tax benefits attached to it. It is suitable for investors having a high risk profile as returns in ELSS fluctuate depending upon the equity market and there are no fixed returns. ELSS schemes are open ended, that is, investors can subscribe to the fund at any day. NAV or the price of the fund is declared on every business day.
 
2. Mutual funds Vs ELSS (difference between ELSS and Mutual fund)
a.         Tax Free: - There is no ceiling for investments in ELSS however investments in ELSS qualify for tax deductions under sec 80C of the income tax act subject to a maximum of Rs 100000 in a financial year whereas investments under normal mutual fund do not qualify for income tax deductions. Any dividend received or long term capital gain earned by the investor is tax free. Long term capital gain arises on selling units of mutual fund after 1 year of purchase. Since there is a lock in period of 3 years every investor will realize long term capital gain/loss on selling their holdings
b.         Lock – In: - ELSS has a lock in period of 3 years unlike other kinds of mutual funds.
 
3. Options while making an investment in an ELSS
a.         Growth option – In growth option income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the NAV of the fund and vice versa. Whenever the investor sells its holdings he will realize long term capital gain/loss. 
 
b.         Dividend option – In this option the fund distributes income earned by the fund to the investors as dividends. The date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any dividend received by the investor is not liable for tax in the hands of investors.
c.         Dividend reinvestments option – If the investors choose this option the dividends declared by the fund are reinvested. For example an investor is holding 10000 units of a fund and the fund declares dividend @ 1.5 per unit, the total dividend of 15000 (10000*1.5) will be reinvested on behalf of the investor as a fresh purchase. The investor can claim deductions to the tune of dividend received which is Rs 15000 in this case
 
4. Monthly investment in ELSS
Monthly investments on a pre specified date in mutual funds is possible through systematic investment plan (SIP). An investor has the option of investing monthly in equity linked savings schemes with a minimum investment of Rs 500. This type of investment is better suited to small investors who cannot invest a lump sum amount. SIP has the benefit of averaging out the cost of investors. As the amount of investment is fixed the units purchases every month varies depending upon the NAV of the fund. At a higher NAV the investor gets fewer units and more number of units at a lower price thus averaging out the cost of investors
 
5. Advantages of ELSS over PPF and NSC
PPF and NSC are popular tax savings instruments issued by the Government of India. Public provident fund (PPF) has a lock in period of 15 years; National savings certificate has a lock in period of 6 years in comparison to ELSS which has a lock in period of 3 years only. PPF and NSC have a fixed rate of return somewhere close to 8% to 9% whereas return in ELSS varies depending upon the market fluctuation, however past performance of some ELSS funds shows an average return of 15% to 25% over a period of time.
 
6. Key points to remember
A – Equity linked savings schemes is a type of mutual fund with 3 years lock in period and tax benefits attached,
B - There are three types of options in ELSS, dividend option growth option and dividend reinvestment option.
C – Tax benefits on investment in ELSS may soon be phased out with the introduction of direct tax code.
D – Investors can opt for systematic investment plan. Minimum investment required in SIP is Rs 500. An investment through SIP has a disadvantage as every monthly investment carries a lock in period.
E - If an investor chooses dividend reinvestment plan the dividend reinvested is considered as a fresh purchase and has a lock in period of 3 years from the date of purchase so the dividend reinvested is further locked for a period of 3 years.
F – ELSS has the potential to give higher returns as these funds invest in equity market which have given an average return of 15 years in a long term scenario. Returns in ELSS also fluctuate depending upon the stock selection decision of the fund manager.
G – SIP helps in averaging out the cost of investors, however if the investor backs out from SIP when the markets are falling he won’t be able to average out his cost.
 
7. Top 5 ELSS
The top 5 ELSS funds presently are

 Equity Tax Saving
 
3 months
6 months
1 yr
3 yr
Axis Tax Saver Fund (G)
1.3
8.5
4.7
-
Religare Tax Plan (G)
-0.4
7.1
0.1
16
ICICI Pru Tax Plan (G)
-5.7
-0.1
-3.4
12.5
Can Robeco Eqty TaxSaver (G)
-1.5
5
-1.1
19.4
HDFC Tax Saver (G)
-3.4
1.2
-2.5
14.8

How to Apply for ELSS
To apply for ELSS an investor needs to comply with KYC regulations, Know your customer (KYC) is mandatory whereby investor needs to provide some personal details like PAN no etc. KYC helps in reducing financial fraud. After complying with KYC the investor can approach to Asset management companies for subscribing to ELSS, Investor has to provide a photocopy of PAN Card along with the subscription form; the form should be filled properly and signed by the investor. The subscription form and a cheque leaf of the investment amount should be submitted with the AMC. In case of SIP (systematic investment plan) one additional form should be filled and signed by the investor. The Investor has to select a date of SIP from the options provided in the form. The Installment amount will be deducted from the investor’s bank account on that day of every month till further notice from the investor.
 
Criteria’s to chose ELSS  
a)         AUM – Asset under management is the amount of money the fund is managing. Higher AUM implies that the fund has many investors and has a good reputation.
b)         Past performance – If the fund is performing well in the past, it is expected that the fund will keep performing well in the future. Generally we look at the past 3 yrs 5 yrs and 10 yrs return of the fund.
c)         Sharpe ratio – Sharpe ratio is used to calculate risk factor of the fund’s portfolio. Sharpe ratio of the fund should be near 1.

  • hasmukh:
    MY ELSS has completed 3 years lock in period. When tried to redeem the amount in has only allowed me to redeem initial invested amount. the three years re invested dividend also fall in three years lock in period? how it is possible. I was expecting cumulative amount of my investment + dividend at the time of selling. This dividend has invested automatically every year and now am not able to get that money now with my initial investment? Does reinvestment option work like this? Or I am misguided
    10-Apr-2013 03:47 PM
  • priyatosh:
    i need to invest the ELSS FUND,i WANT KNOW which fund is best performing scheme available in market and what is document required to opening ELSS.
    13-Mar-2013 01:43 PM
  • Dinesh Joshi:
    Good information. Pl. submit last 5 years performance of top 10 ELSS funds
    02-Mar-2013 09:47 AM
  • Mridula tandon:
    m a middle aged woman wid a 4 yr old datr. m teaching wid Rs 10,000 salary. husband on transferable job so have to move every 2 yrs. therefor my job n income may not b regular . plz suggest a good investment plan keeping my constrains in mind.thnks.
    26-Feb-2013 07:42 PM
  • zavin sharma:
    how and where can i invest through ELSS & what are the minimum annual return through dividend option. is it better than other investment schemes in terms of return and risk pls suggest me.
    08-Feb-2013 05:45 PM
  • NIKUNJ GARG:
    how & where can i invest through ELSS & what are the minimum annual return through dividend option.
    26-Jan-2013 07:13 PM
  • dr kedari:
    great information
    25-Jan-2013 09:57 PM
  • gourav:
    If i invest 30000 in ELSS how much tax exception i will get. what are the charges for entry load and exit load and if any other charges. please reply.
    16-Jan-2013 07:55 PM
  • bk mahapatra:
    How can I invest in ELSS on line? I have DMAT a/c. Should I take in physical form or in DMAT?
    14-Jan-2013 04:14 PM
  • PKG:
    ELSS SIP - MONTHLY INVESMENT CARRIES A LOCK IN PERIOD---- IS THAT PERIOD ONE YEAR OR THREE YEARS.PLEASE CLARIFY
    14-Jan-2013 11:43 AM
  • sanket shah:
    I need to invest in ELSS and i am looking for the best else scheme available in the market. Also do investments in ELSS get the tax benefit under sec 80(c)
    19-Dec-2012 04:30 PM
  • N NAGESWARA RAO:
    I WANT tax benefit and high returns through Equity , if i invest Rs 100000/- in Equity tax plan how much tax exception i can get for year?
    i have ICICI DIRECT.com share market account in that tax plan can i proceed? every month Rs 5000/- like that can i invest in tax plan? or what is your suggestion? if i invest lam-sum of Rs60000/- one time what is the benefit of tax? please suggest to my mail.
    06-Dec-2012 04:43 AM
  • sudhir yadav:
    I am very thankful to you and based on your information I want to close my uti ulip account of Rs 1 lac yearly and want to start SIP in ELSS for long term goal of 10 years.I want to know that it would be the right step please suggest.
    01-Nov-2012 05:17 PM
  • Dr.O.P.Yadava:
    Wonderful elucidation. I would be grateful to know how fair is ten year investment in Max New York Life which has now become Max Life Insurance- Mutual Fund.
    With kind regards,
    O.P.Yadava
    16-Aug-2012 12:08 PM