6 Things to Consider Before Choosing ELSS Fund

29 Oct 2021|

1 min read |

by ICICI Securities Team

Introduction

Tax planning is an essential aspect of financial planning. You should begin from April of every financial year and not indulge in a last-minute rush. Equity-linked tax savings schemes or ELSS mutual fund schemes are an excellent way to set aside a portion of your savings for the long term. You generate steady market-linked returns that help beat inflation and save tax at the same time.

Six parameters to consider before choosing ELSS fund

An ELSS fund refers to an equity-linked savings scheme, a specific variant of mutual funds that give dual benefits of tax savings and investment opportunities in equity mutual funds. Under Section 80C of the Income Tax Act of 1963, these funds provide tax savings of up to Rs 1,50,000 with a locked-in period of 3 years. ELSS funds LTCG are taxable up to 10% without indexation benefits.

Aside from these basic features, investors must carefully consider six parameters before choosing any particular ELSS fund. The six parameters for selecting the best ELSS fund are:

Before even choosing a particular ELSS, an investor must thoroughly investigate the fund house. To gain the maximum tax benefits, investors must choose an established fund house. They are experienced in handling significant investments, and the likelihood of any change in the return rate or the returns due to any external factor is much lower.
Another parameter to consider is the reputation and performance of the fund manager. Since the fund manager is responsible for investing the money invested by the mutual fund holder, it is crucial to consider and choose a fund manager with a good reputation.
The market cap of the ELSS is an essential factor. SEBI divides companies into large-cap, medium cap and small-cap categories. Large-cap companies are the most stable and better for long term investments. The medium cap is suited for flexible investments. Small caps are for those willing to take significant risks.
The size of returns and the size of the risk is linked, with higher risk investments having the possibility of greater returns. Investors must consider the risk and return ratio they might be comfortable in before investing.
Mutual fund returns can be annualised, trailing and calendar returns. Investors must decide which return type they require before investing in ELSS.
The expense ratio, i.e., the amount charged by the fund house for managing the capital invested by the investors. Investors must consider the expense ratio of any mutual fund, within ranges of 1.46% to 2.99%. Generally, an expense ratio that is low to moderate is recommended.

Additional Read: Is investing in Mutual Fund SIP really worth it

Conclusion

ELSS mutual funds present a relatively low risk, stable investment option. However, it is important that investors consider all the aspects of an ELSS before making their investment, in order to reap the maximum benefits possible from such an investment. ELSS aspects can be easily checked by an investor, since all such information is generally under public purview and thus accessible to the ordinary investor.

Disclaimer

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