Act, 1961, where investments up to R1 lakh are eligible for deduction from the gross income.
ELSS funds have a lock-in period of three years, which is in fact, the lowest among other tax-saving instruments like Public Provident Fund, National Savings Certificate and five-year bank fixed deposits. ELSS primarily invests in equity market by buying stocks of listed companies.
While returns from ELSS are tax-free as long-term capital gains and dividends are totally tax-free as per the current tax structure, they will fluctuate depending on the performance of the equity market and the stock selection of the fund manager. These funds also offer SIPs, which are ideal for salaried investors. Analysts say before investing in ELSS, an investor must analyse the track record of the fund for a longer period instead of just looking at 2-3 months' performance. They must also see the dividend payout by the fund and whether it is adequately diversified across sectors. Moreover, ELSS funds provide growth, dividend payout and dividend reinvestment options. Analysts say the growth option is ideal for the salaried class because of compounding benefits. In the growth option, the investor will not get any income during the duration of the investment but only when the tenure ends. The investor will get a lump sum when the investment matures.
In the dividend option, the investor will get a steady flow of income throughout the duration of the investment. However, the income will depend on the market. In the reinvestment option, an investor gets locked in forever. For ELSS, the fund house will announce a dividend and, in the dividend reinvestment option, it gets reinvested and locked in for three more years. So, eventually, an investor will never be able to withdraw, even if it underperforms.
Analysts say unit-linked insurance plans (Ulips) and ELSS are similar as they both offer tax benefits and the corpus is invested in the equity markets. Also, unlike Ulips, ELSS does not offer a switching facility. As a result, an investor is not able to protect his capital in times of market fluctuations. In Ulips, you can switch from equity to debt instruments depending on market volatility. Analysts say one must have a firm investment policy in place that spells out which product to buy for each goal and hold it for long term. Moreover, one must do proper asset allocation and carry out a portfolio rebalancing exercise in line