I have been reading Mutual Fund Insight for the last six months and have developed a liking for it. Now I am thinking about building my own investment portfolio. Can you explain to me how to invest for tax planning? I am new to mutual funds and get confused with the various types of mutual funds available in the market like ELSS, debt funds, equity diversified etc. Please tell me how to initiate tax saving
-Aparna Gokhale
Equity-linked savings schemes or ELSS, as they are more popularly known, offer tax incentives among the mutual funds. Investments up to Rs 1 lakh in ELSS are exempt from tax under Section 80C. ELSS is just one of the specified instruments under Section 80C. Other investments like NSC, PPF and life insurance premium also offer tax exemption under this Rs 1 lakh limit.
For your tax planning, first decide how much you can comfortably invest for the long haul (since all these investments come with a lock-in period ranging from 3-6 years or even more). Then, determine an appropriate asset allocation for yourself, which means how much you want to invest in fixed return instruments like NSC and PPF, and how much into ELSS, which is market-linked.
You can make lump sum investment in fixed return investments, but make it a point to invest in ELSS through a systematic investment plan only. Whatever amount you earmark for equity-linked savings scheme, spread it across the next 6 months of this financial year by investing through a monthly SIP.
Don't get confused with the various types of mutual funds, just select a couple of good ELSS funds and create a monthly SIP. For this, you can select funds from the list of five- and four-star rated funds. Keep in mind that your investment in ELSS will be locked-in for three years, i.e., you will not be able to withdraw this money before the expiry of three years.
This article was originally published on October 06, 2006.
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