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Is an All ELSS Portfolio Fine?

I am 40 years old and want to invest in equities. Is there any harm in investing only in Tax Saving Plans?
-Shrikant B. Tambe

Is it advisable to invest in all the Tax Saver Plans that are given five star rating by Value Research, that is, Franklin India Taxshield, HDFC Tax Saver, HDFC Long Term Advantage and Prudential ICICI Tax Plan? Is there any harm in investing only in Tax Saving Plans? I am 40 years old and want to invest more in equities. My other investments are in Franklin Prima, HDFC Prudence and Franklin Flexi Cap.
-Shrikant B. Tambe

Actually, of the funds that you have referred to as five star, only two, HDFC Taxsaver and HDFC Long Term Advantage are rated five-star currently. In general, using Value Research ratings to choose your investments is a simple and straightforward way of making good choices. However, you must note that four star funds too are 'investment-grade'. In categories like this, where there are very few five-star funds, you should take a look at the funds we have rated four stars too.

Moreover, we don't think there is a need to invest in all the tax planning funds that you have mentioned. There is no merit in adding more and more similar funds to one's portfolio.

Read this issue's cover story 'Building a Great Portfolio' for the nuances of portfolio construction. There is a discussion about the ideal size of a portfolio in that article. We think investing regularly in just a couple of funds will provide you with adequate diversification.

Coming to your concerns over investing only in tax-planning funds, please remember that all of them come with a lock-in period of three years.

Therefore, by investing in these alone, you will not be able to withdraw your money for the next three years under any circumstances whatsoever.

Secondly, although there is no upper limit on investments in ELSS, the tax benefits are available only up to Rs 1 lakh in a year. If you are planning to invest more than that, then it will be good idea to consider diversified equity funds, which will provide you with liquidity.

Coming to your existing holdings, two of your funds- Franklin India Prima and HDFC Prudence have a very good performance record. While the former is one of the picks for investor who want to add mid-caps to their portfolio, the latter figures among the better balanced funds, and is suitable for any portfolio. Franklin India Flexi-Cap is a new fund and has done well as have most funds in recent months. While it's too early to say anything about the fund itself, fund manager K N Siva Subramanian has a great long-term track record with the other funds he manages.