When you begin your investment journey, you are often bombarded with several questions pertaining to the different investment options that can be suitable for your investment portfolio. One of the best investment options could be ELSS mutual funds as these mutual funds offer investors with dual benefits of wealth creation opportunities and tax benefits. In this article, we will understand how you can select the right ELSS mutual funds for your investment portfolio and create wealth. Let’s quickly recall what ELSS mutual funds are.
What are ELSS funds?
SEBI (Securities and Exchange Board of India) defines ELSS mutual funds as a type of mutual funds that invest a majority of their investible corpus ,at least 80% of their assets in equity and equity-related instruments. A tax deduction of up to Rs 1.5 lac per annum are eligible on these tax-saving investments under Section 80C of the Income Tax Act. An investor can save up to Rs 46,800 every year by investing in these tax-saving investments.
How to select the right type of ELSS funds for your investment portfolio?
Here are a few tips that can help you choose the right ELSS tax saving mutual funds for your investment portfolio:
- Stop chasing A-star mutual funds
Investors often find themselves being drawn towards top-performing mutual fund schemes. An investor often ends up making such impulsive investment decisions based on the yearly returns of the ELSS mutual fund scheme they wish to invest in. However, one must understand that the past returns of a scheme does not guarantee the future returns of that particular mutual fund scheme. Instead of considering the recent returns of the scheme, an investor must take into account the performance of the ELSS fund across different investment.
- Always check the risk-return ratio
As per the risk-return principle of investments, a higher degree of risk must be settled by a higher potential of substantial returns. Hence, before you decide to invest in ELSS, you should look for their risk-return potential. You can do this with the help of a financial metric known as Sharpe Ratio. It demonstrates the capability of returns provided for every additional degree of risk taken.
- Look at the structure of the fund
A composition of a particular fund portrays the type of investments or assets a particular mutual fund scheme is composed of. A fund manager is mandated to invest at least 80% of the securities across equity securities. The remaining composition of the fund can be invested across a mix of money market instruments or fixed-income securities depending on the risk profile of the investor. So, an investor with a high risk-appetite might look for ELSS funds that invest majorly in small-cap equity funds rather than large-cap equity funds or mid-cap equity funds.
Now that you are aware of how you can choose the right ELSS funds for your investment portfolio, hope it motivates you to invest in ELSS funds and enjoy the several benefits offered by these mutual funds. Happy investing!