Embarking on an investment journey may plague your mind with a lot of doubts. What is the right investment avenue? Are there any asset classes that will yield more returns than others? Instead of asking yourself a load of questions, it is better to use the time and effort to explore mutual funds. It is also important to note that you should consider your unique investment goals before choosing an investment avenue that best suits you and your needs. If you want moderately good returns and savings on the tax front, ELSS funds will probably be right for you. Equity-Linked Savings Schemes (ELSS) hold a great deal of promise in these respects.
What are ELSS funds?
There are several things to keep in mind before you make any investments, not least knowing how your investments will function and work for you. A diversified plan can’t just diversify your financial portfolio in a broad and varied way but also help you get your long-term goals in order. Additionally, you can avail tax benefits with top ELSS funds. The tax benefits that you get up to Rs. 1.5 lakh according to Section 80 C of the Indian Income Tax Act. ELSS funds invest your money in equity in such a way that your risks are mitigated and your portfolio attains a balanced nature. With a mandatory period of lock-in that spans 3 years, you cannot switch funds or redeem any securities during this period.
Why is it important to choose the ELSS funds that are a perfect match for you? As you cannot get away from a compulsory lock-in period in which you are unable to alter the nature of the fund or redeem your fund, it is imperative that you make the right choice of ELSS funds initially while signing up. How do you make sure that you are selecting the correct ELSS funds? Some pointers may help you to make the right choice to remain in sync with your financial goals and your appetite for risk.
Consider Fundamental Aspects
In ELSS funds, there are some basic parameters you should check while you are doing your research on ELSS funds. You would do well to find out about any given fund’s past performance and the reputation of the fund manager of any fund. The past performance of any ELSS fund may not guarantee the way it will perform in the future, but you can, at the very least, estimate the ability of the management of the fund under various market conditions. In the same way, you can find out about the performance of a fund manager and if they have consistently performed well, that says a lot about how the fund will perform in market conditions that remain the same. Typically, some top ELSS funds will always show that they are run by proficient fund managers.
Check the Portfolio’s Market Cap Composition
ELSS funds are related to multi-caps that comprise a blend of large-cap, mid-cap, and small-cap stocks. Nonetheless, ELSS fund houses reserve the freedom to create higher concentrations of stocks of particular capitalizations. So, any ELSS fund with, say, a high concentration of large-capitalization stocks may be more steady with regard to returns in the long run. Risks may be lessened too. Contrastingly, if any fund is made up of mainly small-cap and mid-cap stocks, you may find some volatility in the fund, and hence, high risk. That is not to say this kind of fund won’t get you good returns, it can, but you will have to tide over periods of fluctuations. Here, it’s best to assess your risk appetite while choosing a fund.
Portfolio Diversification
A range of ELSS funds may adopt various strategies to maintain balanced portfolios regarding the concentration of stocks and corresponding diversification. Some ELSS funds may wish to invest a high percentage with few highly valued stocks. Some may invest in a portfolio with a range of diversified stocks. For instance, if a fund, ABC, has 100 stocks, and the corpus of the fund is evenly distributed within all the stocks, that is a diversified portfolio. Such a portfolio can mitigate the risks of some stocks not performing while others perform and make up for losses.
What is the Expense Ratio of the ELSS Fund?
A ratio that is arrived at by calculating the cost of fund management and the operating expenses of the fund is the expense ratio. If any ELSS fund shows a high expense ratio, that means that returns on investment will be decreased. While investing in ELSS funds, you should look for mutual funds with low expense ratios. At the same time, the performance of ELSS funds should be maintained at or above par.
Make Comparisons, Make Your Choice
While you decide on which ELSS fund to allocate your capital to, be sure to check on your current investments in mutual funds if you have any. You should make sure that you don’t make the error of replicating investment styles and portfolio systems and structures. Various kinds of top ELSS funds can let you appropriately diversify your overall financial portfolio, assuring you of less risk and good returns on investment.
In case you are a novice at investing in the realm of mutual funds, a good broker or financial advisor can aid your choice in terms of the best ELSS funds. You may prefer to invest directly if you are a seasoned player, but be sure to stick it out with your ELSS funds to earn well in the long run.
