Positive towards ELSS part of asset allocation

There are various types of funds that are available and are considered to be ideal for average investor. There are also funds which have the potential to give higher returns in the long term but at the same time they also carry the baggage of high volatility. These particular schemes tend to show losses in the short and medium term, mainly because of their aggressive investment strategies. Such schemes are mainly meant for young investors who have time on their side.

The return potential in case of Mid-Cap funds is high. The Mid-sized or small companies can show up for far better when compared with large-cap companies, who already have a good established status. However, the biggest concern with regard to such funds is the quality of managed. In a downtrend market situation, the risk associated with Mid-Cap companies is far more as they have a lesser ability to get finance being mobilized and they are also not in a good position to withstand competition.

Mid Cap funds take long time for them to recover. Hence, I wouldn’t recommend a high allocation to these funds. However, if at all you want to invest in Mid – Cap funds, you could go ahead through the SIP ( Systematic investment planning ) route. Through this process, you will be able to accumulate more number of units for a fixed installment during downtrends. It is highly recommendable to invest in Mid-Caps only if you are in a position to wait for your portfolio to grow over a period of at least 3 to 5 years.

Mostly people start thinking about tax saving schemes only after the New Year. They would weigh their options and their tax implications. However, people seem to be wary of equity linked tax saving schemes ( ELSS ) or tax saving from the mutual fund houses. People are familiar with the present financial turmoil in the global arena, including India. They have also seen the latest Satyam company issue happening, which has shaken their confidence in the stock market. Hence, due to all this, investors are ready to let go off tax saving schemes this year.

There are people who have experienced negative returns in tax saving mutual fund schemes. Hence, they don’t want to invest in them this year. Although this seems to be a natural psychological reaction, I would yet recommend people to invest into ELSS as part of their asset allocation plan to take exposure to equity. Investors should not avoid ELSS because of bad performance of a year or two.

Investors should understand the fact that they can get only 8 to 9% from schemes like national saving certificate, public provident funds 5 year fixed deposits. But they stand a chance to earn more returns of about 12 to 15% from tax saving schemes. This can happen if the investors are ready to take the risk and are prepared to wait for three to five years. I am making this statement because ELSS comes with a mandatory lock-in period of three years. This happens to be the smallest lock-in period that is available in the 80C basket. You can compare this with PPF, which matures in 15 years, NSC in 6 years and FD requires five years to get the tax break. You should continue to get involved with your tax saving schemes through the investment plan.