How and why to invest in an ELSS?

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 How and why to invest in an ELSS?
Equity linked savings scheme (ELSS) provide you with tax benefits under section 80C of the Income Tax. Unlike any other equity mutual fund schemes, ELSS comes with a lock-in period of three years, because they provide you with Section 80C benefits.

Should you invest in an ELSS scheme?

Equity Linked Savings Schemes invest most of the investor corpus in equities and are hence prone to how the stock markets perform. It is possible that ELSS could provide very poor returns, as well as could provide returns exponential returns on account of their exposure to equity.

One can chose an ELSS scheme when the stock markets are down and could opt for other tax savings instruments when the stock markets have already peaked. For example, to invest in an ELSS scheme when the Sensex is at the current levels of 19,500 could be a risky proposition, since in 2012 the stock indices have already rallied more than 27 per cent.

In the last few years markets have gone nowhere and ELSS returns have not been very high. The best way to seek exposure in ELSS would be through a systematic investment plan. This will help you hedge risks in a falling market.

According to one report ELSS have been attracting huge amount of money and are being preferred over other mutual fund schemes, because of their ability to help save tax.

Things to consider

Before investing in an ELSS Fund take into consideration the past track record of the fund. If you are well versed in the stock markets, you could study the individual stocks in the portfolio. Also, you could look at the investment approach and also the NAV to see if the fund is rather expensive. Stocks that have already appreciated in the portfolio might limit your returns.

In any case, SIP would still be an attractive proposition for investors.

Read more about: elss, sensex
Story first published: Friday, February 15, 2013, 8:53 [IST]
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