How ELSS should be chosen to complement existing portfolio

Usually, we all look for investment opportunities that can help us build an adequate sum of wealth, get regular returns, and/or save taxes. There could be several investment schemes in the market to save your taxes, but ELSS i.e. Equity linked saving schemes is a one - stop solution for all your tax saving and wealth creation needs. Usually 80 % of asset allocation needs to be in equity funds. ELSS SIP is also an easy option for investing where the minimum investment amount is Rs 500.

ELSS funds are also called tax saving schemes as they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act and comes with a three-year lock-in during which they cannot be redeemed or switched. Among other tax saving instruments, ELSS is the scheme with the shortest lock-in.

Six  Key factors To Consider While Choosing ELSS Fund

1. Portfolio composition

A major portion of ELSS funds are equity funds that invest their major chunk into diversified equity or equity-related instruments.  The Fund manager has the flexibility to allocate the stocks as per his calculations, research basis of the market conditions, objective of the fund, and his own risk-taking capability to achieve that objective (i.e. Large Cap / Mid Cap).

You can review what is the portfolio composition of the fund based on market cap and stability of its investment patterns. Prefer to choose the funds that have steady investment pattern and that stay true to its label. Choose quality of companies invested in while assessing the ELSS schemes. Evaluate the stocks concentration in the portfolio and percentage of top five stocks in the portfolio. Thoroughly check all allocation made to large cap / mid cap / small cap companies in the ELSS tax -saving schemes.

1. Risk Involved and Expected Returns

ELSS is an Equity Linked Scheme and it requires you to identify your risk appetite.

 Risk and returns on investments are interlinked. One must ensure to check the risk and returns involved while choosing ELSS funds. Some Mutual Funds could be giving higher returns but risk involved also could be equally high. Therefore, the key to decide your risk appetite while assessing a suitable fund for you. Risk involved can also be calculated from ratios like Sharpe Ratio which is a measure of risk-adjusted return.

1. Return Expectation of the ELSS Funds

While selecting the ELSS mutual fund, it does not make sense to chase returns. Last one-year’s performer may not be consistent next year. Hence, investor must review the trend of the fund in respect of rate of returns delivered. Also, one should consider the rate of return as well as the consistency with which those returns are delivered. Select the scheme based on your preference with the portfolio style and strategy. Make sure to analyze the records of the fund for a period exceeding 5 years. This is an ideal duration, as the fund goes through multiple cycles of ups and downs in the market. This helps the investor to track the past performance of the particular scheme.

1. Expense Ratio of ELSS Funds

Investor should choose the fund with low or moderate expense ratio along with the higher rate of returns.

1. Fund Manager’s performance
2. Fund House

• Examine whether the fund manager is able to deliver consistency of performance across market cycles
• Check fund manager’s profile and his/her record not just in this fund but other funds he/she manages

This is an important factor to select the Tax- Saving fund. Investor must consider the asset management company’s investment philosophy, do a deep background check of its financial stability and company policy before investing

In order to understand how to allocate to ELSS funds, compare ELSS to the other equity funds held, so that there is no duplication in style and portfolio composition.

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.