Sunday, June 6, 2010

ELSS mutual fund

ELSS is a mutual fund that has to invest a minimum of 80 per cent in equity shares. The balance 20 per cent can be in debt, money market instruments, cash or even more equity.

There is a 3 year lock-in period for the ELSS mutual funds. Post the 36 months, the funds remain invested and work like any other open-ended mutual fund. The investor is free to take out the money after 3 years.

Most of the tax saving instruments that fall under Section 80C is saving oriented with returns just about taking inflation into account. The exceptions are the ULIPs (Life and pension funds) and the ELSS (Equity linked savings scheme) mutual funds. The basic advantage of opting for ELSS as compared to the ULIPs is the frequency, mostly a single investment or a monthly investment for a year.

The top 5 ELSS funds have given returns from 22 per cent to 26 per cent compounded annually over the past 5 years. This is again higher than the market returns over the past 5 years which is at 19 per cent.

The return (maturity and the dividend) from the ELSS is also tax free under the present EEE (Exempt–Exempt–Exempt) regime.

If you are on a tight budget, opting for a monthly investment (SIP using ECS) makes complete sense. The automatic investment from the bank through ECS makes it an easy way to invest. In case if you are looking for an income in between, you can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax free return compared to a bank or company deposit, which is taxable.

Most fund houses start an ELSS regular investment at Rs.500/- per month. Single investments start generally at Rs.5000/-. This makes ELSS accessible to all tax payers.

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