Five things to keep in mind before choosing an ELSS
Equity Linked Saving Scheme (ELSS) is a diversified mutual fund scheme that combines wealth creation and tax savings. Under Section 80C of the Income Tax Act, investors can claim ELSS tax benefit up to Rs.1.5 lakh in a financial year. Thus, it is considered as an ideal choice for new investors looking to gain exposure to equities while also enjoying the ELSS tax exemption.
This article lists the top five factors you can consider while choosing an ELSS tax saving investment.
- Asset allocation
Most ELSS funds follow a multi-cap strategy offering the flexibility to invest in small-cap, mid-cap and large-cap stocks. Some funds choose to invest in large-cap stocks with a focus on profitability and stability in earnings. Whereas, some others invest in mid-cap and small-cap segments that can fetch higher returns for investors at a certain risk. It is advisable to evaluate an ELSS fund scheme for its portfolio stability and returns expectation before investing.
- Stock holdings
Be mindful of the number of stocks in your portfolio and the percentage of mutual fund investmentin the top five stocks. If a portfolio concentrates on a top few stocks alone, their underperformance could have a significant negative impact on overall returns. Some mutual fund portfolios have more than twenty to thirty stocks. Having too many stocks can also dilute the performance of the overall portfolio and affect your returns.
- Consistency of returns
It is recommended not to select an ELSS scheme based solely on its historical returns in the last year. Assess and review the consistency of the gains across market phases over the past few years.An ideal fund must be capable of being steady in a falling market and generate better returns than its peers in rising markets.
- Investment tenure
ELSS funds have the lowest lock-in period of three years compared to other Section 80C investment products. However, to reap maximum benefits from the scheme, you can choose to stay invested as long as the plan is performing well. A longer investment horizon can give your funds more time to yield returns and reverse a downward trend.
- Part of financial planning
Consider investing in ELSS funds as a part of your overall investment strategy and not as an isolated decision. It can be wise to compare ELSS funds with other equity fund schemes to check for any duplication in portfolios and styles. Besides, it can also help to calculate the number of equity investments you can accommodate after considering other expenses. For example,contributions to PPF and NPS, which are also a part of Section 80C of the Income Tax Act can also be included as part of your portfolio.
If you are a new investor looking to invest in mutual funds, you can consider ELSS tax-saving investments. It is known to generate decent returns and also save tax up to Rs.1.5 lakh under Section 80C of the Income Tax Act. While assessing ELSS v/s mutual fund, choose a scheme that matches your investment profile.