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ELSS ranked best tax-saving option; Ulips at second place
January, 05th 2015

Stock investments made money for you in 2014. This year use them to save tax. Equity-linked savings schemes (ELSS) stand first in this year's Economic Times ranking of tax-saving options.

Ulips are at second place followed by PPF and the Senior Citizens' Saving Scheme.

We graded eight of the most common tax saving investments on the basis of returns, safety, liquidity, flexibility, taxability and cost of investment. Then they were ranked according to their composite scores.

ELSS scored an admirable 28 out of 30 points. Being equity schemes, they are low on safety but scored full points on all other parameters

The returns are high, the income is tax-free, the investor is free to alter the time and amount of investment, the lock-in of three years is the shortest among all tax-saving investments and the cost is only 2-2.5% a year.

The liquidity factor is higher if you opt for the dividend option and the cost is even lower if you go for direct plans available in this category

Don't look at ELSS funds as one broad category. Within ELSS, there are schemes with a large-cap orientation, which makes them more stable

Funds with a small- or mid-cap skew can be riskier but also have greater potential. Reliance Tax Saver Fund has almost 70% of its portfolio in small- and mid-cap stocks.

It has outperformed the category, returning 41% in the past three years with acategory average of 28%.
ELSS ranked best tax-saving option; Ulips at second place

But most of this growth came in the past 16 months. Between December 2011 and August 2013, Reliance Tax Saver was just another tax-saving fund, struggling with an annualised return of 9%. Since then, it has shot up 93% compared to the 55% rise in the average ELSS. Invest in such turbocharged schemes if you want high returns but don't mind the gut-wrenching volatility.

Investors seeking stability can opt for large-cap funds such as Franklin India Taxshield, Axis Long-term Equity Fund and ICICI Prudential Tax Plan.

These funds will move in line with the broader market and can be part of the taxpayer's core equity portfolio.

A few caveats for investors. While ELSS has shot up in the past few years, tone down your expectations for the coming years. It's obvious that equity schemes do well when the market rallies. It's also true that they suffer when the bears rage.

ELSS carry the same risk as any equity fund. In fact, the risk is greater because the exit route is blocked. Once you invest, you cannot withdraw for three years.

This is why financial planners are advising clients to consider an investment horizon beyond the three-year lock-in period.

"Equities can be slightly risky over a three-year term as one business cycle takes 2-3 years to play out. In a threeyear term, one may get caught on the wrong side of the cycle," says Delhi based financial planner Amit Kukreja.

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