ELSS schemes offer an excellent combination of tax-savings and long-term wealth generation. But just like any other type of investment, due diligence is crucial to select the best. Use the five expert tips discussed in this post to choose the right ELSS for your investment.
ELSS is a type of tax-saving mutual fund scheme that helps investors become eligible for a tax deduction of up to INR. 1.5 lakhs in a financial year as per the 80C of the IT Act. As these funds mostly invest your money in equity and equity-linked products, they generally deliver better returns as compared to other investment options eligible for deduction under 80C.
But with so many AMC’s offering ELSS, how can an investor select the best? These tips can help-
- Focus on the Consistency of the Schemes
Rather than choosing a fund based just on their recent performance, make sure that you aim for consistent performers. The past or recent performance of a fund is in no way a guarantee for their performance in the future. As a result, the funds that have been able to deliver consistent returns are more reliable as compared to a fund that has only excelled in the last month, quarter, or year.
- Check the Portfolio of the Fund
Unlike a large-cap equity scheme which is only allowed to invest in large-cap companies or small-cap funds which invest money in small-cap companies, ELSS funds offer more flexibility. Due to this, it is possible for a fund to tilt towards a particular stock or industry. It is possible that an ELSS fund might be mostly investing in small-cap companies that can be too risky for you. Similarly, there can be funds with mostly large-cap companies in their portfolio.
Go through the portfolio of the fund to pick a scheme that best suits your investment objective and risk appetite.
- Avoid Selecting a New ELSS Every Financial Year
You’ll want to save tax every year. However, it is not necessary to go with a new ELSS fund every year. Do this, and within 4-5 years, you’ll have more funds in your portfolio than you can adequately track. Just select 1-2 consistent performers and stick to them. Even if you want to invest more, invest in the same funds as long as they’re chosen carefully.
- Check the AMC Reputation and Fund Manager Experience
When selecting an ELSS fund, it is vital also to check the reputation of the AMC. Prefer reputable AMCs with vast industry experience. Similarly, also check the manager of the fund you’re planning to select. Check his/her investment style and experience to ensure that your money is in safe hands.
- Growth Option is Better Than Dividend Option
A lot of investors used to go with the dividend option in an Equity Linked Saving Scheme in the past. This allowed them to get some portion of their investment even before the lock-in period of 3 year ends. But with the dividend distribution tax now applicable to all equity schemes, the dividend option is not that interesting anymore. If you’re aiming for long-term wealth creation, it is better to go with the growth option in ELSS funds as compounding helps you generate higher returns.
ELSS funds are currently the best option to save taxes under Section 80C while also generating handsome returns on a long-term basis. Select the best ELSS fund using the tips discussed above to avoid a host of beginner mistakes and pick a top-performing fund for your investment.