The tax-saving season is upon us once again. A whole host of financial products are competing with one another to seek your attention. One such product that is vying for your attention – despite the rather poor performance of the stock market – is the equity-linked saving schemes (ELSS) from mutual funds. They are also known as tax-planning schemes. As the name suggests, these mutual funds schemes invest in stocks and they also qualify for tax deduction if you are ready to part with your money for three years.

Options under section 80C

However, thanks to the large number of products available under Section 80C, you need to weigh your options carefully before committing your money to a particular scheme. On the debt side, you have tax-saving instruments such as National Savings Certificate (NSC), Public Provident Fund (PPF), five-year bank fixed deposits.

All these products offer assured rates of return. However, these instruments have been offering negative real returns (or lower rates than inflation) for some time now and the situation may not change in the near term.

On the equity side, you have ELSS and unit-linked insurance plans (Ulips). Ulips come with a high lock-in period of five years and higher charges, and hence mutual funds serve as a better option to invest in equities that generate inflation-beating returns at least costs. Three-year lock-in is another positive. Other options like NSC come with a six-year lock-in whereas Ulip blocks your money for five years. And PPF is a rather long 15-year haul.

You may also have to look at equity investment if you are looking for real returns in an inflationary scenario. Consider these factors: Inflation is on an uptick, food inflation is still high at 11.05%, and crude prices are soaring. Even the government has admitted that it is difficult to control inflation.

Due to the growth in emerging economies and reckless printing of currencies by most countries in the world, high inflation levels are expected to persist for some time. All these are strong reasons for investors to shop for real returns. In such a scenario, equities are a must. Investment in equities through ELSS schemes can be a good bet to beat inflation in the longer term.

A case for equities

In the short term, the stock markets in India have hit a roadblock. There are too many headwinds bothering investors. There are a series of scams right from the 2G, Commonwealth Games to others like the Adarsh Housing scam. Corporate governance is a constant worry for global investors. Inflation remained a cause of worry despite a tight monetary policy due to supply side issues. Then there are FIIs. As India kept the doors open for foreign flows throughout 2010, when other emerging markets closed their doors, it was a classic case of too much money chasing too few assets. No wonder Indian equities were overvalued compared to the growth prospects. India lost the 'preferred destination tag' for foreign institutional investors.

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

1. ICICI Prudential Tax PlanInvest Online
2. HDFC TaxSaver Invest Online
3. DSP BlackRock Tax Saver Fund Invest Online
4. Reliance Tax Saver (ELSS) Fund Invest Online
5. Birla Sun Life Tax Relief '96 Invest Online
6. IDFC Tax Advantage (ELSS) Fund Invest Online
7. SBI Magnum Tax Gain Scheme 1993 Invest Online
8. Sundaram Tax Saver Invest Online
9. Edelweiss ELSS Invest Online
   
   
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