Investing capital in the share market can be exciting owing to its dynamic nature. Investors seek opportunities that enable them to generate wealth with minimum exposure to risk and optimize tax savings. One such opinion is Equity Linked Savings Schemes (ELSS) funds.
ELSS funds are tax-saving mutual funds that majorly invest in equity instruments. Read on to learn more about the most effective strategies for selecting the ELSS funds in this article.
What Are ELSS Mutual Funds?
ELSS, a type of mutual fund, is focused on equity (stocks) with at least 80% of the total amount invested in stocks and other equity-related instruments but with tax-saving benefits.
They allow individuals to invest in a mixed manner across various sectors and market capitalizations offering exposure to varied growth potentials.
However, the key difference between ELSS and mutual funds is that the former qualify for tax deductions under Section 80C of the Income Tax Act allowing investors to claim up to Rs 1.5 lakh annually. Unlike mutual funds that have no time restrictions, ELSS mutual funds come with a 3-year lock-in period.
5 Strategies to Select The Best ELSS Mutual Funds
Here are 5 interesting strategies to learn when selecting the best ELSS funds for yourself.
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Check Expense Ratio and Fees
Expense ratios of mutual funds have a direct impact on the net returns. A lower expense ratio entails a small portion of the funds’ assets being allocated towards operational expenses.
This benefits the investor as it allows a major share of the capital to stay invested and compound over time. Therefore, select an ELSS fund that balances performance with reasonable costs.
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Study The Fund Manager’s Track Record
Studying and analyzing a fund manager’s track record is a must. An experienced fund manager must actively select stocks on the basis of their fundamentals and possess comprehensive knowledge of the latest developments of the organizations they invest in.
They also track and rebalance it in accordance with other securities to optimize returns and manage risks.
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Assess Performance of Funds
Before selecting any ELSS funds, make sure that you assess the performance of these funds across various market cycles to understand their resilience.
Look for those funds that have consistently outperformed benchmark indices over the long term. Research company stocks where your funds are invested before you invest in MF.
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Analyze Your Portfolio Structure
Before selecting any ELSS funds, go through the portfolio to check if there is any concentration of sectors. For example, too much exposure to one sector can cause concentration risks.
Before investing in ELSS funds, make sure that the underlying stock portfolio is well-diversified and matches your goals.
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Understand ELSS Funds Investment Strategy
ELSS funds focus primarily on large-cap stocks as they are more reliable. However, there are selective mid-cap and small-cap stocks also available for better growth.
Make sure that you invest in growth stocks to appreciate capital and invest in value stocks that are trading below their intrinsic value. This varies from fund to fund and thus you must understand this before investing in any ELSS funds.
Conclusion
This article covered 5 investment strategies that can help you invest in an ELSS fund. Consistent returns and past performance of funds are strong indicators of a reliable mutual fund. Therefore, thorough research ensures that you are optimizing your wealth creation and saving tax over the long term through this investment, making it an effective choice.
