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Investing in ELSS Funds

Mr. Narayanan wants to invest in an ELSS fund to avail tax benefits. He asks us how he can invest in one

I am a novice to fund investing and have a few basic queries. I want to invest in an ELSS to avail of the tax benefit. Can I do so in an existing scheme or do I have to opt for an NFO? Also, what is the basis for allotment of units? When I apply for an existing scheme, will the fund house allot units based on same day's NAV or the previous day’s?
—Narayanan R.

If you are not risk averse, ELSS funds could be the best tax saving tool for you. The 5-year compounded annual growth rate (CAGR) of the category has been 43.01 per cent (as on April 4, 2008), far better than any other tax saving instrument. These funds also offer superior liquidity as they only have a three year lock-in.

Whenever it comes to investing in mutual funds (be it for tax saving or otherwise) you should stick to open-ended funds which have proven their worth in the past. You can trust the older funds as you can assess their past performance in various market cycles and compare it with peers. Though past returns are not indicative of future returns, it would still be a better strategy to opt for experienced funds rather than new ones.

Some good equity tax saving funds which you can chose to invest in are SBI Magnum Tax Gain, Birla Sunlife Tax Relief 96, Sundaram Tax Saver or Franklin India Tax Shield.

As you venture into funds, make sure you adopt the systematic approach to investments and opt for a SIP (systematic investment plan). The basis of allotment of NAV is based in the cut off time set by each fund house.

Most mutual funds have set their cut off time at 3pm. This implies that all applications submitted before 3pm on a particular working day are allotted units according to that day's NAV (declared late in the evening).

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