Everything You Need To Know About ELSS Funds

Wouldn’t it be amazing if an investment gives you good returns and helps you save taxes too?

Yes, that’s exactly what an ELSS fund does. It is a special category mutual fund called Equity Linked Saving Scheme (ELSS) that comes with tax benefits.

Let’s explore what an ELSS fund is in some detail.

What Are ELSS Funds?

Equity Linked Saving Scheme or ELSS is a mutual fund scheme that invests majorly in Equity or Equity related instruments. They are diversified equity funds that qualify for tax deductions and are popularly known as tax-saving mutual funds.

Features Of ELSS Funds

Here are some key features of the ELSS scheme:

• Short Lock-in Period: They have a mandatory and shortest lock-in period of 3 years when compared to other tax-saving products like PPFs or FDs.
• Diversified Fund Portfolio: The fund invests 80% of its corpus in equities and the rest towards fixed-income securities. This in turn allows you have a diversified investment portfolio.
• Inflation-beating returns: ELSS funds invest predominantly in the stock market. Thus, they have the potential to earn higher yields compared to other traditional tax-saving options
• Low Investment Amount: There is no cap or limit on how much you can invest in ELSS. You can even start from Rs 500.
• Invest through SIPs or Lump Sum: ELSS allows you to invest either a lump sum or via the SIP (systematic investment plan).
• Different Payout Methods: ELSS funds offer two types of schemes; growth schemes and dividend schemes. In the growth scheme, you receive a lump sum amount when the lock-in period ends whereas in the dividend scheme you get regular payouts during your lock-in period.
• Tax Benefits: You can save tax up to Rs. 1.5 lakh on the principal amount from ELSS under Section 80C. If your returns exceed Rs. 1 lakh during a year, you are liable to pay an LTCG(Long-Term Capital Gains) tax of 10% on your returns.

Factors to consider before choosing an ELSS fund?

It is crucial curating an investment plan that aligns with your financial goals and income. One scheme might be perfect for an investor, but it is not necessary that it will work for you as well.

Hence, if you are planning to invest in ELSS then you must take these factors into consideration

Past Performance of the Fund

You should check the returns generated by the fund over 3 – 5 years or longer and compare it with its competitors to understand how it has performed through different market conditions.

Fund House History

A fund house is a company that invests and manages mutual funds. The older the fund house the better it will handle the fund’s portfolio in changing market situations. It is advisable to look for fund houses that are 5 – 10 years old.

Fund Manager’s Performance

A fund manager plays a prominent role in managing your funds. If the fund manager performs well and consistently, over a long time, the scheme may project the same performance under similar market conditions.

Expense Ratio

The expense ratio is the cost incurred by an investor in managing the fund. The lower the expense ratio, the higher will be the take-home returns.

Standard Deviation

This parameter of the fund shows how much the fund’s returns fluctuate when compared to the average returns. One must go for funds that have a lower standard deviation.

Sharpe Ratio

Sharpe ratio depicts how much more money will you make for every additional unit of risk the fund takes. Higher the ratio, the better the fund.

Alpha

Alpha gives you an idea of how the fund has performed against its benchmark. A fund that has a positive alpha means it has outperformed its benchmark whereas a negative one would suggest underperformance.

Beta

Beta estimates the volatility of a fund against the ups and downs of the market. The beta of the market or benchmark is always taken as 1. Hence, a beta of 1 or less than1 shows less volatility and is ideal.

Investment Horizon

In ELSS funds your money is invested in the stock market and the market is prone to fluctuations. It takes a while for the stock market to stabilize and yield good returns. Hence one must opt for ELSS if they have a longer time horizon say 5 years.

Over Diversified or Concentrated Portfolio

Do not go for schemes that are over-diversified or highly concentrated. Meaning, the funds should be allocated to a variety of equities and other instruments. You should select a fund that has an appropriately diversified portfolio.