Under section 80, Indians can invest upto Rs 1 lakh in ELSS (Equity
Linked Saving Scheme, also commonly known as Tax Saver schemes) funds
per year/per individual. The amount invested in a ELSS/Tax Saver scheme
is Tax deductible on your tax return.
Now, what is the catch for investing in a ELSS scheme.
(a) Your invested money is LOCKED for a period of 3 years. i.e., Once
invested in a Tax Saver fund, your money cannot be taken out for a
period of 3 years. But this is a blessing in disguise, because Tax
Saver funds generally yield healthy returns during a 3 year period.
(b) Except for the Pension plan funds which usually locks the money
until the age of 58 or so, all ELSS schemes invest upto a 100% in
equities/stocks. Therefore, inherently investing in a ELSS is risky.
Comparing equity mutual fund and a tax saving one, I would say Tax
saving funds generally perform better because there is less pressure on
the Tax Saving fund manager to SELL during down markets for redemption
to unit holders.
With plain vanilla Equity MFs you could buy them today and dispose of
them tomorrow - i.e., there is no time limit for redemption, except for
exit loads. However with ELSS MF funds, there is a compulsory 3 YEAR
lock in for Equity funds and a mandatory lock in up to the age of 58
years for Pension funds.
Contrary to the popular theories, ELSS funds also comprises of Pension
fund, such as Franklin Pension, which does not invest more than 50 to
60% in equities.