Equity Linked Saving (ELS) Scheme for Mutual Funds

Many believe that two months into the new financial year is perhaps too early to worry about tax planning. This belief can be harmful, particularly for those planning to invest in Equity Linked Saving (ELS) Schemes of Mutual Funds. ELS schemes offer tax rebate under Section 88 for an investment upto a maximum of Rs 10,000. These schemes typically invest atleast 80 per cent of their corpus in equities and carry a three-year lock-in period. The unitholder is free to redeem his holdings once this lock-in expires at a price based on the Net Asset Value (NAV).

Timing can be advantageous. Since ELS Schemes invest primarily in the equity markets, timing can be a distinct advantage for any investor. At a time when equity markets are down, exposure can be made to these schemes to lower holding cost. Thus, an investor can put in money in these schemes even at the beginning of the financial year if, in his opinion, the equity markets at that moment present a good investment opportunity.The situation turns even more advantageous when the concerned ELS schemes decides to distribute a dividend or bonus during the lock in period. Dividends distributed and the units credited in the event of a bonus declaration are not covered by the lock in clause. Thus, an investor can, in these schemes, get back a portion of his money invested even during the operation of the lock in period.

There is however a catch to this. Claiming dividends in these schemes is extremely beneficial presently as all dividend distributions from open-end equity funds are not charged with any distribution tax.The third advantage is that this investment comes with greater transparency. Mutual Funds are, by law, required to disclose their portfolio to their unitholders. It is therefore easy for the investor to monitor how his investment is doing. Another advantage is that these schemes carry an upside potential as they invest in equities. Most other tax saving alternatives carry a fixed rate of return.

But a smart investor can choose well keeping in mind the following parameters. Scrutinise Past Performance: While past performance is no assurance that a scheme will do well in the future, it is a good indicator of its future potential. Choose the correct option: Many ELS Schemes offer a choice between dividend and growth options. Choosing the dividend option will make an investor eligible to receive dividends from the scheme which, if declared during the lock in period, serve to reduce the total capital locked in. 

Source(Aru Shrivastav)