Aditya Birla Sun Life Mutual Fund

How to choose an ELSS Fund?

Mar 08, 2019
4 mins | Views 9044

Is your employer or chartered accountant chasing you to submit your investment proofs for this financial year? Are you thinking about investing in an ELSS to save on tax,but are overwhelmed by all the varied ELSS options out there?

Worry no more, we are here with tips to help you choose the ELSS product right for you.

Snapshot of ELSS

ELSS, an acronym for ‘Equity Linked Savings Scheme’, is a mutual fund product which invests a majority of its corpus in equity and equity related products. It has a lock-in period of 3 years. Investment in ELSS comes under the ambit of section 80C of the Income-tax Act, 1961 and thus amongst other benefits also offers tax saving benefit to its investors.

Here are the key factors to consider while choosing an ELSS product

  • Fund performance over the years

    It is easy to get lured into funds which are among the recent chart toppers. The key however is to take a holistic view of how the fund has performed over the years, preferably over your preferred time horizon (1 year, 3yrs,5 yrs and since inception). Look to choose funds which have provided reasonable returns over funds offering windfall gains.

    As ELSS funds are market driven, it is important to see how they have performed in times of economic downturn. Funds which perform reasonably in the market indicate expertise of its fund managers and could be preferred.

  • Dig a little deeper – fund diversification and risk attached

    Performance alone cannot be considered. The performance of the fund should be viewed along with the risk it assumes.

    The key feature of any ELSS is that it invests in diverse equity instruments. Yet, every ELSS has a different and specific investing pattern – such as in a mix of small cap and mid-cap equity or in large cap equity. Aggressive investors can choose mid-cap oriented funds – which may give high returns but are more susceptible to high losses in downturns. Conservative investors can choose large cap oriented portfolios which are considered as relatively stable and safe investments.

    Some funds have majority of their portfolio invested in their top 10 stocks, whereas others have a more evenly spread portfolio.Choose an ELSS whose portfolio matches your personal investment strategy and risk outlook.

  • Turnover ratio of the fund

    Turnover ratio of a fund represents the frequency of replacements of its stock holdings and is usually indicated as a percentage over a period of one year. A fund which has a 50% turnover ratio, replaces 50% of its stock holdings over a year.

    What makes for a good turnover ratio is subjective depending on each investor’s individual outlook. A higher ratio could indicate a more aggressively managed fund with an aim of generating higher rate of return.

    While making the choice of the right ELSS for you, seek a fund that has aturnover ratio that matches your investment goals.

  • Go for growth

    ELSS funds offer both dividend and growth options. Although dividend may give you returns in consistent intervals, growth option funds accumulate and re-invest the dividends, offering an additional benefit of compounding to the returns on your investments.

  • Be in it for the long run

    The key is to not consider ELSS merely as a tax saving tool but an effective wealth creation tool. Choose to stay invested in funds (beyond the lock in of 3 years) and aim to generate higher returns in the long run.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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