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I  am 24, with a net monthly income of Rs 26,000. I would like to invest in Equity Linked Saving Schemes.

I was told by a mutual fund agent that it is better to invest a lumpsum in ELSS rather than through a Systematic Investment Plan. What do you think?

I was also told that for ELSS schemes, it is better to go for dividend option rather than growth? Is it wise? I already have a regular income.

Apart from HDFC [Get Quote] Tax Saver, which other ELSS fund would you recommend? I would prefer large cap ELSS funds with at least a five-year track record.

For long-term savings (five to 10 years), I have selected HDFC Prudence, HDFC Top 200, HDFC Equity and Franklin India Bluechip through an SIP. What do you think of this selection? I don't want to take too much of a risk.

- Dhruman Patadia

SIP or lumpsum?

When you invest though an SIP, you put in small amounts every single month. Since there is a lock-in period of three years for investments in ELSS, each month will have a separate lock-in period. So, if you invest in January 2006, you will be able to sell your units only in January 2009. Your February 2006 investment can be sold in February 2009.

When you invest through SIP in an ELSS, the lock-in period for each installment will start from the day the investment is made.

But that should not pose to be a hindrance. If you are investing for the long-term, then a three-year lock-in on each installment should not be a problem to you. We do not think it would be wise to invest substantial amounts at one go.

Moreoever, there is concern about the risk involved in a lumpsum investment now, when the stock market is at an all-time high. But, the fact remains that you cannot know in advance as to whether the market will rise or fall.

Therefore, an investor's best bet is SIP.

• Equity funds to consider

Growth or dividend?

The basic advantage of the growth option is that you get the benefits of compounding over a long term. All the profits are ploughed back into the fund and you benefit by an increased Net Asset Value.

But, if you are in need of a regular income, you should opt for the dividend pay-out option.

ELSS funds

Franklin India Taxshield, HDFC Long Term Advantage Fund, HDFC Taxsaver, Magnum Taxgain and Prudential ICICI [Get Quote] Tax Plan are the best ELSS funds. 

Since you have already invested in HDFC Taxsaver, stick with it. It is one of the best funds in the category, one of the least volatile and an investment worthy choice.

In the category of ELSS funds, the only large-cap fund is the Franklin India Index Tax, which tracks S&P CNX Nifty Index, and hence invests only in the stocks of the index.

But do keep in mind that its returns will also be in close sync with the returns of the index, while most of the actively managed funds historically have out-performed the index funds.

Therefore, invest in it only if you would be content with returns close to that of the Nifty.

Apart from that, you would not find a single ELSS mandated to invest in large caps.

• The best ELSS funds

Diversified equity funds

You have chosen some of the best diversified equity funds for investment.

HDFC Prudence is also one of the picks in the category of balanced funds (funds that invest in both, equity and debt).

You can keep investing in these funds systematically.

You can achieve sufficient diversification by investing in these funds. If you would like to look at some of the better funds in this category, have a look at the star ratings given to each fund on our website.

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