6 Tips for Choosing ELSS Funds

by Shreya Paliwal Mutual Fund Financial services

Saving tax is one of the goals of investors. When you embark on an investment journey, you often face questions about the best products. The Equity Linked Saving Scheme works on both returns and tax-saving aspects. It is a diversified Equity scheme helping you achieve long-term financial goals while providing tax deductions of up to Rs. 1.5 lakh.

ELSS Funds are one of the types of Equity Oriented Mutual Funds that give dual benefits and opportunities for investment. They provide tax benefits under Section 80 C of the Income Tax Act 1961. They come with a three-year lock-in period, which means you cannot switch before completing the investment tenure. Here are other parameters to consider before investing:

Market cap composition

When you invest in a Mutual Fund, knowing the market cap composition is necessary. The fund requires at least 80% of its investment in equity instruments. However, there is no restriction on the allocation. The market cap categories are large-cap, mid-cap, and small-cap.

Large-cap companies are stable with moderate returns and lower risk. Invest in these companies through the app for approximately five to seven years. Mid-cap companies give higher returns. The risk involved is also higher than large-cap companies. Invest in them for seven to 10 years to get the desired returns. Small-cap companies involve high risk and return potential than others.

Risk and returns

Funds delivering higher returns come with higher risk and vice-versa. The key to selecting the best fund is understanding your risk profile. If you are an aggressive investor, choose a higher allocation in mid or small-cap stocks. Keep it intact for at least seven to 10 years.

Review of returns

While investing in Tax-Saving Mutual Funds, review the trend of the fund to the rate of returns delivered. Also, consider the consistency of the return delivery. Track the fund records for at least eight to 10 years. Consider the annual, trailing, calendar, and rolling returns.

Expense ratio

A high ratio shows a high amount of expenses paid by the fund. Opt for ELSS Funds with a low or moderate expense ratio and a high return rate. The fees include registrar fees, fund management fees, distributors’ commission, advertising costs, and the custodian’s share.

Fund manager

Understand the probability of return consistency in the future. If the fund has a good and consistent manager with decent performance in the past, it may also provide decent returns. Always check the fund manager’s profile and record before investing.

Fund house

Consider approaching an established fund house rather than a new one. It has experience in handling large investments and setting decision-making processes. The fund manager change does not significantly impact the returns delivered.

Final words

Since ELSS investments are usually linked with long-term financial goals, starting a Systematic Investment Plan (SIP) can help you average your buying cost per unit. Talk to an investment advisor for guidance on helping you create a plan suiting your objectives.