If you are planning to invest in ELSS Mutual Funds and are confused about the options available, then keep these five crucial points in mind to choose the best one for yourself.
When it comes to investment and tax saving, Equity Linked Saving Schemes (ELSS) are a popular choice for many. It not only helps you avail the benefits of tax deductions under Section 80C but also ensures good returns by investing a significant part of your money in stocks. As ELSS comes with a 3-year lock-in and you can invest up to Rs 1.5 lakhs per year to enjoy a tax deduction.
There are plenty of options available when it comes to ELSS. It often it leaves many investors confused. In this article, we discuss five crucial points that can help you decide on the best ELSS product.
Look For Consistent Performers
Many investors often give into temptation and put their money in ELSS products which are recent performers. They are tempted to invest in schemes despite bold warnings that past performance is no guarantee of future performance.
An ELSS product would have performed well in the last year, but dig deeper and you may find it underperformed the category average in the last 4-5 years. What you should do is look for ELSS products that have had a good track record over the past 5-10 years and are managed by good fund managers.
If you are comparing the performance of the ELSS fund over the last 5 years, split the 5-year returns into annualised returns. This will help you find consistent performers by comparing the performance of the ELSS product against a benchmark or category average.
Select ELSS Funds Of Top AMCs
The Asset Management Company (AMC) of the ELSS and the fund manager who manages it are very important. Invest in ELSS products from the top 10-15 AMCs with a proven track record of at least 5 years.
You can choose an ELSS with considerable Assets Under Management (AUMs). Choosing to invest small amounts in ELSS via a Systematic Investment Plan(SIP) is another option. As ELSS products invest most of your money in stocks, SIPs are the best route to avoid volatility.
Don’t Invest In Multiple ELSS Products
It would be a big mistake to invest in a new ELSS fund each year. In a few years, you will have a portfolio of many ELSS Funds, making tracking and managing them difficult. Invest in 1-2 ELSS funds which are consistent performers rather than just the latest top performer, which could be a new scheme each year. Change the ELSS Fund only if there are changes in the fundamental attributes of the fund.
Check The Portfolio Of ELSS Product
Invest in an ELSS fund whose portfolio is consistent with your financial needs. An ELSS is a diversified product with investments across sectors like auto, financial services, IT, banking, FMCG and so on. While Equity Mutual Funds clearly define the investments in large-cap, small-cap or mid-cap stocks, ELSS funds could have a distinct tilt towards particular stocks.
Some ELSS funds could invest with a focus towards large-cap stocks, while other ELSS funds could invest with a bias towards mid-cap stocks, with a modest large-cap exposure.
All ELSS Funds enjoy the tax deductions under Section 80C of the Income Tax Act. Pick ELSS funds based on your risk profile. If you are an aggressive investor, pick an ELSS fund which leans towards mid-caps. Mid-caps can give high returns, but if the stock market crashes, losses are high. An investor in ELSS, who is conservative, will opt for a portfolio oriented towards large-caps, which is considered a safer investment.
Go For The Growth Option In ELSS
You might be tempted to opt for the dividend option when you invest in an ELSS product as there’s no lock-in period for it. You and other investors will receive dividends before the 3-year lock-in period ends.
Your financial advisor would advise you to choose the growth option instead. This is a long-term investment where the profits are reinvested.
Many people had invested in the dividend option of ELSS products as the dividends were tax-free. But now, after the Union Budget, there’s a dividend distribution tax on equity-oriented schemes. So, it is advised to choose the growth option in ELSS products.
Do not invest in ELSS funds for the sole purpose of tax saving. You should stay invested for a longer period to reap the benefits and wealth creation.