What You Should Know Before Investing in Equity Linked Savings Schemes

Types of investments

What You Should Know Before Investing in Equity Linked Savings Schemes
By [http://ezinearticles.com/?expert=Radha_Reddy]Radha Reddy and G Rajasekhara Reddy

Equity Linked Savings Schemes are popularly known as ELSS Mutual Funds. They are open ended mutual funds with a lock in period of three years. The lock in period is for availing tax benefits under Section 80C of Income Tax Act 1961. Although, there is no limit for investments in ELSS Mutual Funds, maximum tax exemption is available for an investment up to 1,00,000 rupees.
ELSS Mutual Funds have the shortest lock in period of 3 years compared with other similar tax saving investments. For example, bank fixed deposits have a lock in period of 5 years to avail tax exemption. These funds invest more than 65% of funds in equity and related instruments and are eligible for Long Term Capital Gains (LTCG) Tax exemption. Moreover, all the dividends paid by the scheme are tax free in the hands of the investor.

Investments in these funds can be done either as a lump sum payment or through systematic investment plan. It is advisable to invest through SIP which has rupee cost averaging benefit. Most people rush to invest in these tax saving funds in the end of March. This last moment investment may not be optimal for investors as with systematic investment planning. Minimum investment is 500 where as in other funds it is 5000 rupees. Both dividend and growth options are available. Choose the option as per requirement and once opted a choice, it is not possible to change it during lock in period.

Although these funds offer shorter lock in period, multiple tax benefits, they are not suitable to all investors. Investments in equities and related products have high market risk. These are subject to high market volatility. There may be loss of capital too while investing in equity linked products. Before investing in such schemes one must check whether they are suitable for their risk profile.
Although, equities are volatile and risky in short span of time, they provide higher returns. As an asset class equities provide best inflation adjusted returns in long term.
It is true that past performance of any mutual fund may not be repeated in future. But studying the performance of the fund over longer periods can give more predictable future performance of the fund.

It is a good idea to link your investments in mutual funds to a long term goal which has emotional bearing. It can be buying necklace to wife, Child marriage and so on. This will help to reduce the temptation of redemption without major reason. Most investors choose to redeem their investments when markets are performing badly. By doing so, they miss further appreciation opportunity.
You can see more details and comparison of various ELSS schemes see [http://teluguinvestor.com/blog/mutual-funds/elss-mutual-funds-multiple-benefits/]ELSS Mutual Funds

Article Source: [http://EzineArticles.com/?What-You-Should-Know-Before-Investing-in-Equity-Linked-Savings-Schemes&id=7559359] What You Should Know Before Investing in Equity Linked Savings Schemes

Types of investments