Equity Linked Saving Scheme [ELSS] is one of the top tax saving investments available to investors. Apart from providing tax exemption under Section 80C, ELSS also provides healthy long term returns by investing equities. ELSS are diversified mutual funds with minimum 80% of the investment in equity and equity related securities with a lock-in period of 3 years.
Once you have decided to invest in ELSS. There are a few tips to select the best ELSS schemes as per your need.
Consistent Performers – While selecting an ELSS Mutual Fund to invest in, don’t just blindly invest in the scheme providing the highest returns. Instead, look for schemes which have consistently performed well over the past 5~7 years. It is always better to opt for a scheme that has been among the top performers over the last 5~7 years rather than for one which is the most recent ‘winner’. Such consistent performers have successfully weathered different cycles in the market and have a higher probability of providing decent returns in the future as well.
Fund Manager – Before investing, read about the fund manager associated with the fund. Study the performance of the fund manager over the past few years in all the funds that he/she has managed. Analyze the investment style of the fund manager and whether it is in sync with your investment goals. The period of association of the fund manager with the scheme is also an important factor. i.e. if the fund is being managed by the same fund manager since inception or the fund manager has changed recently.
Portfolio of ELSS Scheme – ELSS schemes of different AMCs can be very different in terms of asset allocation. One scheme could be heavily investing in large-cap stocks while the other may have a multi-cap approach. One needs to identify the scheme suitable to his/her risk profile and investment goals. For example, a high risk-taking investor might choose to opt for a scheme where the investment is concentrated in small and mid-cap stocks. Similarly, an investor with a lesser risk appetite may opt for a scheme allocating its funds across market capitalization from large cap to small cap stocks. It all depends on the investment goal and risk profile of the investor.
Mode of investment – Like any other mutual fund scheme, this tax saver mutual fund scheme is also available in both Lump sum and SIP. When investors invest one single amount in the mutual fund it is called lump sum.
SIP [Systematic Investment Plan] – SIP is a method to invest a fixed amount in a mutual fund on a regular periodic basis. Investments can be done on a daily, monthly or quarterly basis on a fixed date. The investor has the flexibility to choose the mode of investment. If the investor is investing towards the end of the fiscal year, for example in January, then it might be better to opt for a lump sum investment to take benefit of the total exemption limit. If the investor is able to schedule his/her investments at the start of the fiscal year, then it may be better to opt for an SIP.