Since ELSS funds are essentially equity instruments, you shouldn’t select one or the other in your portfolio if your investment duration is only a few years.
A popular tax saving option, ELSS (Equity Linked Saving Scheme) Mutual Funds are a preferable way to help you save tax as a deduction in Section 80C of the Income Tax Act. You are allowed a deduction of up to Rs. 1,50,000 and should ideally look to avail of the same every financial year.
By extension, if ELSS Funds are your instrument of choice in this regard, there are a few important factors you can keep in mind before you make your investment.
Investment Amount & Horizon
Since ELSS funds are essentially equity instruments, you shouldn’t select one or the other in your portfolio if your investment duration is only a few years. Aim for the long term, and keep in mind that each of your investments into an ELSS fund is locked in for a period of 3 years from the date the units are allotted.
In addition, it is advisable to not invest into ELSS more than necessary. At the start of every year, you should calculate the maximum amount you can channel as a deduction under Section 80C after other commitments such as Life Insurance or your Provident Fund, and invest the remaining amount into your ELSS fund of choice.
Fund Size & Characteristics
There is a buffet of ELSS funds available for you to choose from, and you should factor in the rest of your portfolio before making your selection. In particular, look closely at the market cap allocations and styles on offer, along with fund size.
Correlate all of these variables with your own risk profile before zeroing in on one or two ELSS funds.
SIPs over Lump Sums
As with all equity funds, Systematic Investment Plans (SIPs) help you tide over market volatility and generate long-term wealth that surpasses inflation. You can base the frequency of the SIPs as per your convenience and cash flows. However, if you leave your tax planning until late in the year, you might be forced to make a lumpsum investment. In such cases, there is no guarantee that you will not catch a market high and adversely impact your returns in the process.
If you are a salaried individual, opt for a monthly SIP to match the salary you receive typically at the end of every month.