Investing in mutual funds, types of investment, ELSS tax saving mutual funds, mutual funds, mutual fund investment, deduction under section 80c, types of mutual funds, tax saving mutual funds
A lot of investors choose Equity-Linked Savings Scheme (ELSS) for tax-saving purposes. What’s more, as ELSS mutual funds allocate a significant portion of their portfolio towards equities and equity-related securities, they have the potential to achieve significant returns. Hence, these funds offer the dual benefits of wealth creation and tax-saving purposes to investors. Though ELSS funds are widely popular among investors for all the right reasons, it is important to choose the right ELSS for your portfolio. The right ELSS fund will not only help to achieve your financial goals faster but will also complement your investment portfolio. Here are a few tips to help you choose the right ELSS schemes for your portfolio.
How To Pick The Right ELSS Tax-Saving Mutual Funds?
Following are some tips to help you choose the right ELSS funds for your investment portfolio:
1. Stop Chasing Top-Performing Funds
Investors often chase high-yielding funds. They get attracted to these funds based on their annual returns. However, what one misses is that while the fund has generated significant returns in the past, there is no assurance that it will continue to do so in the future. Today what may be considered as a top-performing fund might deliver exceptionally poor returns in the next quarter, and vice versa. Hence, rather than focusing on the past returns of the fund, one must consider their performance and returns over different periods and market cycles.
2. Risk-Return Principle
According to this principle, a higher degree of risk is often compensated by a higher level of rate of return. So before investing in any type of mutual funds, including ELSS mutual funds, look for their risk-return ratio. You can determine it using the Sharpe Ratio. It demonstrates the capability of returns offered by a fund for the extra degree of risk taken.
3. Check The Composition Of The Fund
The composition of the fund is a testament to the type of asset classes and/or securities a fund invests in. A diversified ELSS fund should invest in different types of securities across diverse industries and market capitalizations. Remember, no two ELSS mutual funds can have the same fund composition. So, if you are looking to earn significant returns at the cost of exposing your portfolio to a higher degree of risk, your ELSS funds must invest their significant portion in small-cap funds and mid-cap funds. However, if you are do not wish to undertake too much risk, you might consider sticking to large-cap funds.
The decision to invest in mutual funds must be a well-thought. Before you decide to go forward with ELSS funds factors such as your financial position, investment horizon, financial goals, and risk profile must be taken into account. One must not invest in ELSS for the sole purpose of saving tax.
Analyze if there is room for ELSS investments after taking into account several types of investments such as National Pension Scheme (NPS), repayment of the mortgage, insurance premium, Public Provident Fund (PPF), etc. all of which are usually found in a household and form of a part of Section 80C investments. In short, if you have already surpassed the limit of Rs 1.5 lacs per annum by investing in these investments, you need not invest in ELSS for the sole purpose of deductions under Section 80C. Happy investing!