How to choose the right ELSS fund?

Posted On: 30 November 2023

An Equity Linked Saving Scheme is a type of mutual fund that primarily invests in equities or stocks. These funds come with a lock-in period of three years and offer tax savings under Section 80C of the Income Tax Act, 1961. Now, let's get straight to the point and discuss how to select the right ELSS mutual fund for your financial goals.

Table of contents

Factors to consider while selecting ELSS funds
Investment strategy of ELSS fund
Performance
Risk metrics
Consistency
Fund manager expertise
Fund-in period
SIP or lumpsum
Professional advice

Factors to consider while selecting ELSS funds

ELSS funds offer long-term growth potential and tax benefits. However, they also come with a three-year lock-in period. This makes them suitable for investors with a long investment horizon who do not need immediate liquidity and are also seeking to reduce their tax liability. Read on to find out more about these and other factors you should consider when choosing an ELSS scheme.

Investment strategy of ELSS fund

One of the primary factors to evaluate when choosing an ELSS fund is its investment strategy. Different ELSS funds may follow varying approaches when investing in equities. Some funds focus on large-cap stocks, which are known for their relative stability, making them suitable for risk-averse investors. On the other hand, some funds adopt a more aggressive approach, investing in mid and small-cap stocks to harness the potential for growth, albeit at a relatively higher risk. Your choice should align with your financial objectives, risk tolerance and investment horizon.

Performance of ELSS fund

Past performance is a crucial factor in assessing an ELSS mutual fund's track record. You should look for funds that have consistently delivered a relatively better return potential. However, it's important to note that past performance is not a guarantee for future success. Therefore, it's advisable to evaluate the fund's performance over various time frames to gain a holistic view of its historical performance.

Risk metrics

Evaluating the risk associated with an ELSS fund is paramount. To do this, you can refer to specific risk metrics that provide valuable insights into a fund's risk-adjusted performance. Here are some common metrics you can use:

Sharpe ratio

This metric measures the risk-adjusted returns of a fund. A higher sharpe ratio suggests that the fund can generate more significant returns for the level of risk taken.

Read also: How is Sharpe ratio calculated?

Standard deviation

Standard deviation indicates the volatility or fluctuation in a fund's returns. Lower standard deviation implies lower volatility, which is often more suitable for risk-averse investors who prefer a relatively stable investment.

Consistency of ELSS funds

Consistency is the hallmark of a sound investment strategy. When choosing an ELSS mutual fund, it's essential to seek funds that have consistently delivered returns across various market conditions. Avoid funds that have exhibited extreme fluctuations in performance, as they may not be suitable for long-term wealth generation. Instead, opt for funds that have demonstrated the ability to offer relatively better returns consistently.

Fund manager’s expertise

The expertise of the fund manager plays a pivotal role in the performance of the ELSS mutual fund. Investors should seek out the fund manager's experience and track record in managing equity funds.

Lock-in period:

It's crucial to be aware of the lock-in period associated with ELSS funds. ELSS funds have a mandatory lock-in period of three years. Ensure that you are comfortable with this lock-in duration and consider it as part of your investment strategy.

SIP or lumpsum in ELSS funds

Decide whether you want to invest in ELSS funds through a Systematic Investment Plan (SIP) or a lump sum investment. SIPs allow you to invest regularly and benefit from rupee-cost averaging, which can be a practical approach for salaried investors aiming for long-term gains. A MF SIP calculator can help you plan your monthly contributions by giving you an estimation of potential returns.

Professional advice

Lastly, it's always prudent to seek advice from a financial advisor or distributor when choosing an ELSS mutual fund. They can assess your financial situation, risk tolerance, and investment goals to recommend the right ELSS fund based on your unique needs.

Conclusion

Selecting the right ELSS scheme is a vital step toward achieving your financial goals through mutual funds. Always align your objectives, risk appetite, and investment horizon with the fund's investment strategy.

In summary, when it comes to choosing the right ELSS fund, it's not about finding the "best" fund, but rather one that aligns with your objectives and risk appetite. Keeping an eye on expenses and deciding on the investment method that suits you, whether it's SIP or a lumpsum, are also crucial. However, it's essential to remember that investing in mutual funds carries inherent risks, and past performance is not indicative of future results. To make a sound investment decision, it's advisable to seek the guidance of a financial advisor or distributor. They can help you tailor your investment choices to your specific financial goals and risk tolerance.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.