A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money so collected is then invested in the capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus, a Mutual Fund is the most suitable investment for a common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

The flow chart below describes broadly the working of a mutual fund:

· All investors pool their money in a common investment vehicle.
· Then money is then entrusted with the fund manager.
· The fund manager invests the money in different kind of securities as per the objective of the scheme.
· The return realized from the invested amount is passed on to the investors in proportion to the units held by them.

The mutual fund industry in India was started in the year 1963 with the formation of the Unit Trust of India at the initiative of the Government of India and Reserve Bank.

Advantages:

Flexibility: With a wide range of features to select from, such as systematic investment plans, systematic withdrawal plans & dividend reinvestment, mutual funds offer flexibility to the investors.
Affordability: Mutual funds are available in units and hence, are affordable even by a small investor. Besides, the large corpus enables even a small investor to benefit from its investment strategy.
Liquidity: In open-ended schemes, you have the option of withdrawing or redeeming your money at any point of time at the current NAV
Portfolio Diversification: As mutual funds invest across different industries & stocks, the risk is lower.
Professional Management:The funds are managed by expert fund managers who based on experience & research invest after analyzing all options, thus, giving the investor the advantage of a professionally managed fund

Introduction

The ELSS schemes are tax saving schemes that invest their asset in equities. The ELSS schemes offer a tax rebate to the investors under specific provisions of the Indian Income Tax laws. Investments made in ELSS and pension schemes are allowed as deduction under section 80C of the Income-tax Act, 1961. A sum of up to Rs 1 lakh invested in them during the financial year will qualify as a deduction from the income of the individual. Tax-saving funds are a key part of any portfolio. The act also provides opportunities to investors to save on capital gains. Investments in the ELSS schemes have a lock in period for three years. Such investments, therefore, can work for unit holders for a fairly long time, long enough for the NAVs to appreciate. The returns however are not guaranteed as they ultimately depend on the market.

These funds, however being basically equity schemes carry high risk unlike a PPF or a NSC, where your investment grows at a steady pace. With equity funds, you risk losing your capital, let alone not earning a return. Investors should compare the tax-saving funds with the other choices before them, including National Savings Certificate (NSC) or Public Provident Fund (PPF) etc. However, it is to borne in mind that lock-in period under the scheme is the lowest in the ELSS when compared with the PPF and NSC. While the said schemes are debt oriented in nature, the ELSS schemes are equity oriented in nature.

There are two new fund offers of ELSS in the market
· HSBC Tax Saver Equity Fund.
· Lotus India Tax Plan.

Avantages of investing in an ELSS

Ø Potential for capital appreciation through equity exposure.
Ø Benefits under section 80C of the Income Tax Act.
Ø No tax on Capital Gains for investments made in these schemes.
Ø Dividends are tax free in the hands of the investor.
Ø Shorter lock-in period of 3 years compared to other tax saving instruments.
Ø 3 year lock-in period also has the benefit of minimizing volatility.
Ø Allows regular investments of small amounts through the SIP route.
Ø Historically, equity linked savings schemes have provided better returns as compared to other tax saving instruments over periods greater than 1 year.

Disadvantages of investing in an ELSS

Ø The only major disadvantage in investing in the ELSS funds is that they have a lock in period and an investor will not able to redeem his money before three years.
Ø There is no assurance or guarantee of returns

Suitability

An investor, who has a long-term horizon (due to the three year lock in period), is willing to take risk while investing in equity portfolio and has a tax liability to be taken care of.

In the last two year the mutual fund industry has shown a rapid growth, the asset under management in mutual fund industry has shown a growth of more than 33% per annum.  India is a developing economy and second fastest growing economy in the world with the GDP growth of 9.2% per annum, it provides numerous opportunities to the fund manager to invest in the under valued stocks. Govt. of India is planning to invest the pension funds of the govt. employees in the stock market, through the route of mutual funds. Number of foreign AMC’s are in the que to enter the Indian markets like Lazard Group, The UK-based investment bank, is expected to enter the Indian asset management business through Lazard India and Mirae Asset Management, the largest mutual fund house in Korea, is in the process of getting regulatory approvals from SEBI to launch its asset management operation here.
The saving rate of Indian is the highest saving rate in the world around about 23-25% of the income, as now most of the investors are aware about the mutual funds and willing to invest in mutual fund according to their risk taking capacity rather to put them into bank fixed deposits. ‘B’ and ‘C’ class cities are growing rapidly. Today most of the mutual funds are concentrating on the ‘A’ class cities. Soon they will find scope in the growing cities.
India is the largest consumer of gold in the world and India contributes 35-40% of the world total demand for physical Gold. In India people buy most of physical gold from investment point of view, and in the current year the concept of gold Exchange Traded Fund (ETF) knock the door of Indian mutual fund industry, three mutual fund companies already launched the Gold ETF and other fund houses are in a que for launching it. Due to the launch of gold ETF, most of the investors may invest in the golf ETF not in the physical gold, which will help the mutual fund industry to grow further. Investment in the ETFs was first come into effect from America, in the beginning years the concept of the gold ETFs were failed due to low trading volume but now more then 60% trade in the American stock exchange has come from the ETFs. SEBI allowing the MF’s to launch commodity mutual funds.

Why one should invest in Gold ETFs
· Plummeting US Dollar
The Greenback is trading at the historically lower level against the Euro due to major slow down in US economy. Flaming crude oil prices, which are at multi year high, are also pressurizing dollar to see the further decline. Hence, both of these factors are supporting gold prices. Furthermore, decision of fed rate cut by the federal reserve of US has already sent dollar at the bottom, which ultimately gave much awaited strength to gold.  Magical movements in gold have attracted the attention of investors. As a result, people have started to park their money in ETFs’ also.
There is a negative correlation between US currency and the gold prices, when the dollar weakens on the foreign exchange market over an extended period then the US$ gold price will generally rise during the same period; and when the dollar strengthens over many months the US$ gold price will usually fall. 
Dollar weakness and safe-haven buying amid unstable equities and an ailing US economy sent the precious metal to new 27-year highs last week.
· Supply Constraints
Despite the significant increase in the gold price since 2000 and the bullish demand scenario, world gold supply has remained static, as the sale of gold by central banks has been falling. Net official sector or central bank sales in the first six months of 2006 are down 60% year-on- year and full-year total net sales are forecasted to dip below 400 tonnes. Mine production in the first half of 2006 fell by 1.5% year-on-year to 1,168 tonnes. So, gold supply is forecasted to remain static or increase only very modestly but demand is set to continue rising which will lead to rise in the price of gold and it will add to the returns of gold ETFs.
· Rising crude oil prices:
There’s always been a strong relationship between crude oil and gold. Oil price is an important driver of the gold price. Currently, crude oil prices are running on the high time high, it has crossed $90 per barren. There is a positive correlation between the crude oil prices and the prices of gold. An increasing oil price results in increasing inflation, negatively impacting the global economy, particularly oil-dependent economies such as the US. Apart from increased transportation, heating and utility costs, higher oil prices are eventually reflected in virtually every finished product, as well as food and commodities in general. Furthermore, there is evidence that global oil production is peaking and the flow will soon be in permanent decline. Gold moves up in tandem with inflation. In other words, gold is a natural hedge against rising inflation. It is known fact that gold prices hit the roof during the second oil shock in the late seventies and in the current situations too.
· Increasing investment and jewellery demand:
The US, which accounts for 10 % of world gold demand, is also one of the markets where public taste in gold jewelry is enjoying a renaissance. The renewed interest in gold also extends to Japan, a market that showed a 19% increase in demand. The Indian market – the world’s largest for gold demand is also higher following the marriage and festival period. The Indian wedding season runs from December to May and with about eight million marriages each year, typically generates a noticeable spike in global gold demand.

Among the all tax saving instruments the ELSS is the best investment for saving the tax.

Equity Linked Saving Scheme (ELSS):
The ELSS schemes are tax saving schemes that invest their asset in equities. The ELSS schemes offer a tax rebate to the investors under specific provisions of the Indian Income Tax laws. Investments made in ELSS and pension schemes are allowed as deduction under section 80C of the Income-tax Act, 1961. A sum of up to Rs 1 lakh invested in them during the financial year will qualify as a deduction from the income of the individual. Tax-saving funds are a key part of any portfolio. The act also provides opportunities to investors to save on capital gains. Investments in the ELSS schemes have a lock in period for three years. Such investments, therefore, can work for unit holders for a fairly long time, long enough for the NAVs to appreciate. The returns however are not guaranteed as they ultimately depend on the market. These funds, however being basically equity schemes carry high risk unlike a PPF or a NSC, where your investment grows at a steady pace. With equity funds, you risk losing your capital, let alone not earning a return. But the PPF and the NSC both have a long term lock in period as compared to the ELSS.
Investors should compare the tax-saving funds with the other choices before them, including NSC or PPF etc. However, it is to borne in mind that lock-in period under the scheme is the lowest in the ELSS when compared with the PPF and NSC. While the said schemes are debt oriented in nature, the ELSS schemes are equity oriented in nature and the risk associated with it is also high.

Advantages of investing in an ELSS
Ø Potential for capital appreciation through equity exposure.
Ø Benefits under section 80C of the Income Tax Act.
Ø No tax on Capital Gains for investments made in these schemes.
Ø Dividends are tax free in the hands of the investor.
Ø Shorter lock-in period of 3 years compared to other tax saving instruments.
Ø 3 year lock-in period also has the benefit of minimizing volatility.
Ø Allows regular investments of small amounts through the SIP route.
Ø Historically, equity linked savings schemes have provided better returns as compared to other tax saving instruments over periods greater than 1 year.

Disadvantages of investing in an ELSS
There is no assurance or guarantee of returns

 
Life Insurance Premiums:
Contribution made by an individual for the life insurance, whether in the traditional money back plan or modern ULIP plan qualifies for tax deduction and the minimum lock in period for the ULIP plan is three years but the charges under the ULIP plan is higher than ELSS. Through the maturity amount is tax-free.

Public Provident Fund (PPF):
PPF is the best tool for saving the income tax; it generates compounded eight percent tax-free incomes for the investor. But the only shortcoming in the PPF is that it has a lock in period of 15 years and the maximum amount, which qualifies for the tax deduction is Rs.70000\- only.

National Saving Certificate (NSC):
NSC is a fixed return scheme and provides for tax saving benefit too! Returns are at compounded half yearly 8% for duration of only 6 years. Here, investors are required to make a single deposit and the interest is returned along with the principal amount on maturity. NSC investors enjoy tax saving benefits. But the interest earned through NSC is subject to taxation.

On the whole ELSS is the best investment for getting the tax deduction, whether in terms of lock in period or in terms of returns and the tax-free returns, though investment in the ELSS is little risky. Since tax-saving funds invest in the stock markets, they are prone to high volatility in the short to medium term. In the long-term (over three years), although it is generally stated that the investor will be compensated for the risk he is taking by way of a higher return. It should be understood that there are no guarantees, i.e. there is always the possibility that at the end of the three-year period investors may lose part of their capital, let alone earn a return on it. This may seem like an extreme scenario, but it is not. There are several instances in stock market history where returns have been negative or very low not just for a year or two, but for decades.
In the year 2007, tax saving mutual funds has generated marvelous returns. Most of them have generated a return more than 55 percent for the investors in 2007.  Taurus Libra Taxsheild Fund is on the top in the list with the return of more than 110 percent in 2007 followed by Principal Personal Taxsaver Fund with the return of 85.53 percent.
While investing in the ELSS fund an investor should always opt for the growth or dividend payout. An investor should not opt for the dividend reinvestment option because in this option an investor can never get his money out completely, The dividend, which is automatically reinvested by your fund, amounts to your subscribing for additional units and thus qualifies for fresh deduction. But you need to keep in mind that in an ELSS, a dividend reinvestment would mean locking the fresh amount for another three years from the date of such a receipt.
For example:
You invest 10,000 in ELSS scheme with dividend reinvestment in 2007. (You can redeem these units only after a three-year lock in 2010)
Assume-Dividend of 1000 declared in 2008. The dividend units get added to your kitty by way of reinvestment (these units can only be redeemed in 2011)
Assume -Dividend of 1200 declared in 2009. The dividend units get added to your kitty again (these units can only be redeemed in 2012)…and it goes on like that…so a fraction of your investment can go unredeemable.
So, please stay away from dividend reinvestment option while investing in tax saving ELSS.

There are four new fund offers of ELSS in the market
· Lotus India AGILE Tax Fund
· SBI TAX Advantage Fund
· Reliance Equity Linked Saving Fund
· JM Tax Gain Fund

At last an investor should not put all his eggs in the one basket, he should invest in different asset class for achieving the tax deductions.
Age (Years) Life insurance premium EPF PPF / NSC ELSS Total
< 30  10,000 10,000 20,000 60,000 1,00,000
30 – 45 10,000 20,000 25,000 45,000 1,00,000
45 – 55 10,000 30,000 30,000 30,000 1,00,000
> 55 10,000      –  65,000 25,000 1,00,000
The table above lists an indicative asset-allocation plan for individuals across various age groups. As can be seen, as you grow older, the allocation has to change in favour of the low-risk instruments.