Mutual fund investments are climbing the charts to being an effective investment avenue for investors. One such variant is the Equity Linked Savings Scheme [ELSS], which is a diversified mutual fund scheme that invests at least 80% in equity and equity-related instruments.
Investing in ELSS can help save tax by allowing investors to claim an ELSS tax benefit under the Section 80C of the Income Tax Act up to Rs.1.5 lakh in a financial year. Additionally, it offers the lowest lock-in period of three years compared to other Section 80C counterparts.
This article looks at the ideal number of ELSS funds you can include in your mutual fund portfolio.
The ideal number of ELSS funds
Typically, an ELSS fund invests in 70 to 100 stocks. So, if you own 5 ELSS funds that means you own around 500 stocks [though not necessarily]. A portfolio with as many as 500 stocks is similar to owning the entire market.
There are around 5000 listed stocks in India, out of which 90% of the total market cap is concentrated on the top 250 stocks. Even if you own half of these 250 stocks, you eliminate your chances of beating market returns. If your aim of investing is to achieve market returns rather than beat them, you can consider investing in an Index fund. These funds charge low expense ratios as compared to ELSS funds.
On the other hand, if you have invested in only one ELSS fund, there is a risk of the fund under-performing. This can, in turn, impact your returns. To diversify the risk across different stocks, you can invest in 2 to 3 ELSS funds, and not more than that. Ensure no common stock holdings are overlapping in various schemes as that can bring down your overall returns during a downward trend.
The investment horizon for ELSS funds
Even though ELSS funds have a lock-in period of three years, mutual fund advisors ask investors to maintain an investment horizon of at least seven years. It is not compulsory to withdraw your funds on the completion of the three-year lock-in period. If the fund is performing well, you can keep continuing to stay invested, as it can give you a better chance of reaping decent yields in the long run.
Most ELSS schemes have a multi-cap strategy allowing them to invest in small-cap, mid-cap and long-cap funds. Thus, when you stay invested for a longer investment horizon, you give your funds more time to weather market volatility and generate good gains compared to short-term.
Conclusion
If you are a new investor looking to invest in mutual funds, you can read more on ELSS v/s mutual fund before you start investing. With ELSS tax saving instruments you can enjoy ELSS tax exemption up to Rs.1.5 Lakh under Section 80C of the Income Tax Act. It is advisable to have not more than two ELSS schemes as part of your portfolio. This can prevent duplication and over-diversification due to overlapping of portfolios of different schemes.