ELSS, or Equity-Linked Savings Schemes, is a trendy investment option for investors in India. It offers investors dual benefits: tax savings and the opportunity to earn high returns on their investments. In ELSS investment, the investor’s capital is diversified in various market instruments, and a considerable part of this investment goes into equity and other equity-related instruments.
One of the noteworthy benefits of ELSS investment is that, under Section 80C of the Act of Income Tax, investors qualify for a tax exception. This allows an investor to save nearly ₹1.5 lakh in taxes, alongside providing exposure to equity markets. In this article, let us learn the key factors that investors should consider when choosing the top ELSS funds for investing.
Factors to Consider When Choosing ELSS Funds
Below are some essential factors to consider before choosing ELSS funds:
Fund House Reputation
The primary factor to consider before selecting an ELSS fund is the fund house’s reputation, that is, managing the ELSS fund. An established fund house usually has a track record of effectively managing investments and also navigating market fluctuations. Investors should look at the past performances of fund houses. A fund house with a good reputation is more likely to have experienced professionals who can effectively manage investments. Thus, increasing the chances of achieving the desired financial goals.
Fund Manager Track Record
The ELSS investment performance is majorly dependent on fund managers. A good fund manager helps investors make the right investment choices that not only align with market trends but also with their financial goals. When assessing the track record of a fund manager, do consider their past performance; viewpoint on investment, and experience in managing funds. A good fund manager, along with a successful track record, should also be transparent about their investment strategies and decision-making procedures.
Market Capitalisation
Market capitalisation is another significant factor to consider when choosing ELSS funds. SEBI defines companies in three different categories depending on their market capitalisation. Let us look at the categories defined by SEBI:
Large Cap Funds: These funds are primarily invested in well-known companies with moderately low volatility and steady earnings. Large-cap funds are typically suitable for risk-averse investors who are looking for stable growth in their investments.
Mid-Cap Funds: These funds are invested in average-sized companies with growth potential. However, they carry comparatively more risks than large-cap funds.
Small Cap Funds: A small-cap company might provide immense returns, but the risk is extremely high due to its highly volatile nature.
Note: Investors should evaluate their risk appetite and investment horizon before choosing one of these categories.
Expense Ratio
Another significant factor that interferes with ELSS investment returns is the expense ratio. The expense ratio represents the yearly fees charged by the fund house for managing investors’ investments. A lower expense ratio means more funds are working for the investor rather than being paid out as fees. The expense ratio for mutual funds often ranges between 1.46% to 2.99%. While investors need to consider cost, they should also weigh the cost against the potential benefits offered by higher-cost funds, like superior management or better performance history.
Risk-Return Profile
Risk-return profile is one of the crucial factors when considering investing in ELSS. This factor helps investors make informed financial decisions. Usually, higher returns are often associated with higher risks. Investors must evaluate their risk appetite against the expected returns from the fund. Investors are advised to analyse the historical performance of the fund and understand how it reacted during market recessions. Assessing these factors helps investors select a fund that aligns with their financial objectives and risk tolerance level.
Different Types of Returns Provided
Other important factors that investors should consider would be the different types of returns offered by ELSS, or Equity Linked Saving Schemes. Understanding the various types of returns offered by ELSS helps investors get an insight into what returns they can expect from their investments. This helps investors to make an informed investment decision that also aligns with their specific financial goals. Let’s have a look at some of the returns offered by ELSS:
Yearly Returns: This represents the average annualised return offered by ELSS over a period.
Calendar Year Returns: This represents the calendar year performance of the fund.
Trailing Returns: This reflects how much the fund has returned over a variety of time horizons, like in one year, three years etc.
Conclusion
ELSS, or ‘Equity Linked Saving Schemes’ is a popular investment option that helps investors save tax and also builds wealth over time. However, to gain the full benefit of this investment scheme, investors need to consider a few crucial factors before finalising the fund. Consider factors like the fund house’s reputation, the track record of the fund manager, market capitalisation focus, risk-return profile, expense ratio, and types of returns offered by ELSS. Investing in mutual funds has become simpler with the best mutual funds app accessible for users on their smartphones. The online apps help investors manage their portfolios and track their investment performance, which eventually helps them in making informed investment decisions.