Tips To Choose the Best ELSS Mutual Fund
Tips To Choose the Best ELSS Mutual Fund
Investing in Equity Linked Savings Scheme (ELSS) mutual funds is a great way to save taxes under Section 80C and build wealth over the long term. The ELSS mutual funds invest predominantly in equities and hence carry higher risk compared to other tax saving options. However, they have the potential to deliver superior inflation-adjusted returns over the long run. Choosing the right ELSS fund to invest in can be tricky for many investors. Here are 5 tips to pick the best ELSS mutual fund for your portfolio:
1. Analyse Past Performance
The first thing you should check is the past track record of the fund over 3–5-year periods. Look at the fund’s performance across different market cycles like bull and bear markets. Consistent performance over different types of markets indicates the fund management’s stock picking capabilities and risk management skills. However, don’t just run behind last year’s top performers or funds that have done well only in bull markets.
2. Evaluate Roling Returns
Analyse the rolling returns of the fund over 3 and 5-year periods. Rolling returns measure the fund’s performance over different periods while holding the start date constant. This gives you a better sense of consistency than simple point-to-point returns. Look for a fund that has consistently delivered healthy rolling returns over different 3-to-5-year periods in the past.
3. Check Portfolio Concentration
Review the portfolio concentration of the ELSS fund. These funds tend to be more concentrated with around 20-30 stocks. High concentration in a few stocks may lead to higher volatility. Before investing, ensure the fund’s portfolio is adequately diversified across various sectors, market capitalizations, and stocks. Well-diversified portfolios can help manage overall risk better.
4. Analyse Fund Management
The fund manager plays a critical role in the performance of an actively managed ELSS fund. When selecting a fund, analyse the track record and stability of the fund management team. Choose a fund where the fund managers have showcased their stock selection skills by delivering consistent returns over different market cycles in the past. Also evaluate the tenure and stability of the fund management team. An experienced and stable fund team is vital.
5. Opt for Direct Plans
Always opt for the direct plan instead of the regular plan when investing in ELSS funds. Direct plans have lower expense ratios compared to regular plans since they do not pay any commissions to distributors. This difference in expense ratio, compounded over long periods, can result in significant difference in overall returns generated by direct and regular plans. Going direct helps improve your overall returns.
Conclusion
In addition to the above, also analyse key metrics like expense ratio, portfolio turnover, etc. before selecting the right ELSS fund. Do not blindly chase last year’s winner. Investing through Systematic Investment Plan mode can help average out market volatility. Overall evaluate ELSS mutual fund holistically based on parameters like performance, portfolio, and fund management before making an informed decision. Invest wisely.
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