ELSS Mutual Funds

A Unit Linked Insurance Plan, popularly called ULIP, is a financial product that offers the twin benefits of life insurance as well as an investment. Part of the premium paid goes towards the sum assured (amount one gets in a life insurance policy) and the balance gets invested in the investments one desires, be it equity, debt or a mixture of both. Thus, ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment.

ELSS funds have a lock-in period of three years. This could be restricting, but look at the other side of the picture. With the lock-in period in place, the fund manager need not grapple with redemption pressure every day and can remain fully focused on investment in equities. This helps your money grow over a period of time.

ELSS is structured like open-ended equity funds. So you can invest at any time of the year. When you sell the units of these funds, you can benefit from long-term capital gain, under which you don't have to pay capital gains tax.

If numbers make the case more convincing, here are some examples of ELSS that have actually beaten the benchmark decisively. As a category, ELSS gave an annualized return of 44.41 per cent. On a case to case basis HDFC Long term Advantage gave returns of 65.59 per cent, Birla Equity Plan 56.52 per cent, and Magnum TaxGain 56.52 per cent.

While these breath-taking returns may entice just about anybody, there is one warning: Even as equities provide high returns over the long term, it is a risky asset class because of its volatile nature.

If the stocks markets get caught in a bear grip, you may have to wait for years to make money. But the likelihood of that happening is low.

The best way to invest in ELSS is to buy shares/units worth a fixed amount of money every month. In other words, go in for systematic investment plans.