Equity-linked saving schemes, or ELSS, serve as a popular tax-saving option for investors. ELSS Mutual Funds serve as a perfect tax-saving investment solution offering a deduction of up to 1.5 lakhs in a financial year. With the twin benefits of tax saving and wealth creation, ELSS Mutual Funds are offered by various asset management companies that investors can select from by following the guidelines below:
ELSS funds:
Equity Linked Saving Schemes or ELSS include equity and other related instruments investments. With a lock-in of 3 years, the ELSS funds help Investors to grow their investments and even use the invested amount to claim as a deduction from their financial income. However, to select the best fund that matches investor preference and investment objective, the following guidelines can be followed:
1. Fund performance:
Investors can grow their wealth through mutual funds investment. They invest a significant amount of their income in selected mutual funds to earn exponential profits. Investors must therefore analyse the past ELSS funds’ performance to select the best that offers the maximum returns with minimum risk. Past two, three, and even 5 year returns must be analysed to identify the ELSS funds which offer equal opportunity to create wealth and protection from market volatility. A comparison with the broader market indexes like Sensex and Nifty 50 can be made as well to select the fund that has been able to beat the broader market performance.
2. Selection of a well established asset management company:
ELSS Mutual Funds are managed by professional asset management companies with reputations. They hire professional managers to manage ELSS mutual funds, making them responsible for the fund’s performance. Some popular ELSS funds include SBI long-term equity fund, HDFC ELSS Tax Saver Fund, Motilal Oswal ELSS Tax Saver Fund, Nippon India ELSS Tax Saver Fund, etc. Investors must opt for complete research and select a professional company with a positive track record. Skills, experience, and fund management performance of mutual fund managers must be analysed as well.
3. Analysis of ratios and returns:
Selection of the best ELSS tax saving mutual funds is also dependent upon the analysis of their underlying expense ratio and returns. The expense ratio refers to the portion of the invested amount that is deducted by mutual fund managers for their services. Different ELSS funds have different expense ratios depending on various aspects. Select the best fund that has a low expense ratio. The overall past returns must be used as well to analyse and select the best ELSS mutual funds.
4. Comparison with risk profile:
Investors must even analyse and compare their selected ELSS mutual fund with their existing risk profile. With a significant lock-in period, ELSS funds may require management and decision-making. With careful comparison with the risk-taking capacity, an ELSS fund with diversified exposure to different types of equities can be selected.
Conclusion:
ELSS mutual funds require proper research due to their lock-in period, expense ratios, and exit loads. Though they offer tax and wealth creation-based benefits, careful analysis and research are essential to select the best ELSS funds.