Investing money is always a smart move, particularly when you are planning to earn high returns. Most experts suggest investing in equity mutual funds to achieve this goal. But, if you make the right decision with your investments, it can offer you more than just returns. You can get tax benefits and save more money. ELSS or equity linked savings schemes offer such an opportunity.
ELSS funds are those mutual funds that invest primarily in equity-related assets. These funds offer dual benefits to the investors, capital appreciation, and tax-saving benefits under section 80C of the Income Tax Act (old regime).
But to maximise the benefits of ELSS funds, you have to invest wisely. It is more than just selecting an ELSS scheme with the highest returns potential. You need to carefully assess the fund’s past performance, asset allocation pattern, portfolio concentration, objectives, expense ratio, and other factors. Let’s explore these factors in detail to help you make strategic decisions and maximise your tax savings.
- Look for a consistent performer
Look for a fund that shows consistent performance over the years, showing resilience even during market fluctuations. Also, check the risk management strategies implemented by the fund to achieve their performance. Research the fund’s performance for at least 5 years, as equity mutual funds are long-term investments.
- Invest in ELSS funds with low expense ratios
The expense ratio is the fees charged by the fund house to finance their fees and manage your investments. The lower the expense ratio, the better the chances of achieving higher returns. So, invest in ELSS funds with lower expense ratios, as more of your investment will go towards generating profits and less towards paying fees.
- Research and compare different fund houses
Most experts advise investing in ELSS mutual funds managed by a reputable fund house with a good track record. So, compare the performance track record, investment philosophy, and strategies of different asset management companies to shortlist ones that fit your investment goals and risk appetite.
Don’t just rely on past performance or ratings, but also evaluate the consistency of the returns generated by the fund house over a longer time horizon. This can give you an idea of AMC’s capabilities to handle your investment and bring returns.
- Check the portfolio diversification
Look into how much exposure the ELSS fund has to large-cap, mid-cap, and small-cap stocks. This will help you evaluate the risk-return profile of the fund and invest accordingly. Check how its assets are divided between equities, debt, and money market instruments to understand the fund’s asset allocation. You should also examine the fund’s top holdings to analyse how well they fit with your investment philosophy.
To wrap up
Investing in ELSS funds can be a smart financial move to capitalise on equities’ growth potential and leverage tax benefits. But ELSS investments are not just about tax savings, they also offer an opportunity to create long-term wealth. So do not make impulsive decisions after getting influenced by short term fluctuations and instead adopt a long-term perspective.
A systematic investment plan (SIP) in ELSS funds can help you automate your investments and remain disciplined throughout different market conditions. Consulting a financial advisor can add more value to your investment journey. They can help you identify the right ELSS funds that fit your age, income, finances, tax-saving goals, and long-term growth objectives.