Come the last quarter (January-March) of each financial year, it is not uncommon to find the salaried class scouring the horizon for making investments in tax savings instruments in a bid to bring down their tax liability.

Normally, the tax-savings schemes or instruments that come first to taxpayers' mind are the public provident fund, pension plans, national savings certificate and national savings scheme. These instruments, no doubt, are gilt-edged when it comes to protection of investors' capital (they offer assured returns, so no loss of capital) but their returns leave much to be desired.

However, if you desire superior returns as compared to the plain vanilla traditional savings schemes /instruments, then you could consider investing a portion of the Rs 1,00,000 tax savings limit under Section 80C of the Income Tax Act in equity linked savings schemes (ELSS) floated by various mutual funds.

Why ELSS?

Among all the instruments that are eligible for tax benefit, ELSS has the lowest lock-in period of three years. ELSS mainly invests in Indian equities with an objective to generate capital appreciation over a period of time.

The lock-in period of three-years for investments helps the ELSS fund manager to season and mature investments in companies which have hidden growth potential.

The India growth story continues to be strong and makes it compelling for any investor with a three year horizon to participate and generate capital appreciation.

• 10 stocks to make young investors crorepatis 

Time and again it has been proved that equities have outperformed all other asset classes over a long period of time. A study of the top performing schemes shows that on an average they gave 30 per cent plus returns in the last one year and 40 per cent plus in the last three years as compared to eight per cent returns given by the administered savings schemes.

The real returns post inflation and taxes are significantly higher as compared to any other traditional form of tax savings instrument.

By investing in ELSS, taxpayers not only reduce their immediate tax liability u/s 80C but the gains earned out of the investments also qualify for long-term gains resulting in zero tax as per the current tax laws.

It's simple�

If you are thinking how to go about investing is ELSS then it is very simple and easy to invest in the ELSS of mutual funds (MFs).

~ All one needs to do is fill up an application form, attach KYC (know your customer) documents and a cheque for the amount you would like to invest.

~ The forms are available with the retail outlets of MFs, banks, broking firms, and financial advisors spread across the country.

~ Unlike investment in stocks, a mutual fund investor is not required to open or maintain a demat account.

Out of all the schemes -- growth, income, balanced, money market, tax-saving and special (index and sector-specific) -- being offered by MFs, only ELSS has a compulsory lock-in period of three years from the date of investment.

• Market crash: A quick guide for young investors 

What this means is that in case you have invested through the systematic investment plan (SIP) route ie a fixed amount of investment every month, the lock in for the last SIP will be three years from the date of the last installment. You can remain invested even after the lock in period is over in case you do not need funds at that point of time as equities generate higher growth over longer period of time.

What's in an NAV?

While choosing an ELSS, do not be misguided if somebody advises you to invest in a scheme which has a lower net asset value (NAV) as against the one which has a higher NAV. There is a myth that lower NAV is cheap and higher NAV is expensive.

Let me illustrate with an example.

Let us assume that you invest Rs 10,000 in scheme A with NAV of Rs 10 and also in scheme B with NAV of Rs 100. You get 1,000 units in scheme A and 100 units in scheme B. The markets are expected to deliver, say, 20 per cent return. One year later the NAV of scheme A will be Rs 12 and of scheme B Rs 120.

If you redeem both the schemes, you will get Rs 12,000 from scheme A (1,000 units* Rs 12) and Rs 12,000 from scheme B as well (100 units*Rs.120).

Think of your financial goals

If you have to choose between ELSS and the administered (fixed) interest rate schemes, your decision should be based on your need (financial goals) rather then any other reasons.

• Market crash: 'I lost Rs 1 lakh in 60 seconds'

While making a decision to buy ELSS or other MF schemes, do not get carried away by the last few years' returns as past performance is no guarantee of future performance. What you should look at is the track record of the fund house, the investment team, consistency in terms of performance and the kind of processes and experience the investment house offers.

Among others, MFs like Kotak, Fidelity, Reliance [Get Quote], HDFC [Get Quote] and DSP have been giving decent returns to investors. So, if you are considering making investments for lightening your tax burden this financial year, then ELSS should also be a part of your tax-saving portfolio. It not only gives you the opportunity to participate in the India growth story but also saves taxes, thereby making it a great investment tool.

The author is a certified financial planner. He is also national head (Wealth management & portfolio management services), Almondz Global Securities. The views expressed here are personal.

Courtesy: