Investing in mutual funds, including tax-saving ones, requires careful consideration. Experts often advise being cautious when selecting ELSS tax-saving funds. This guide aims to help you choose the right ELSS fund for your investment portfolio. But first, let’s quickly review what ELSS mutual funds are all about.
ELSS (Equity Linked Savings Scheme) funds are tax-saving mutual funds that must invest at least 80% of their assets in equity and related securities. These funds allow for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. By investing in ELSS, you can save up to Rs 46,800 annually if you’re in the highest tax bracket, offering the benefits of both capital growth and tax savings.
Here are some tips for choosing the right ELSS tax-saving mutual funds:
Avoid Chasing Top Performers
It’s tempting to go for mutual funds that are performing well, but decisions based solely on annual returns can be misleading, as there’s no guarantee of future results. A fund doing exceptionally well today may not perform the same way next quarter. Rather than focusing on recent returns, assess the fund’s performance over multiple time frames.
Evaluate the Risk-Return Ratio
Usually, higher risk comes with the potential for higher returns. Before investing in ELSS funds, consider their risk-return potential. The Sharpe Ratio can help determine this by showing the returns a scheme generates for the extra risk taken.
Examine the Fund’s Composition
The composition of a fund indicates the types of assets or securities it holds. A diversified equity fund like an ELSS should invest in various securities across different market caps and industries. Remember, you can’t entirely eliminate market risks with mutual funds, especially equity-based ones. No two ELSS funds have the same composition. If you’re aiming for high returns and willing to take on more risk, opt for funds with a higher allocation in small-cap funds. Conversely, if you prefer lower risk, consider funds primarily investing in large-cap stocks.
It’s always wise to thoroughly evaluate a mutual fund before investing to avoid poor decisions. Make sure your investments align with your time horizon, risk tolerance, and financial goals. Happy investing!
