If you are looking to invest in ELSS, also known as Equity-Linked Saving Schemes, as part of your taxplanning, make sure that you do the required due diligence while choosing them. Experts frequently ask investors to be cautious when selecting ELSS tax-saving funds. This article will provide you insights on how to choose the right ELSS funds for your investment portfolio. But, before we get to that, let’s quickly recall what ELSS funds are.

What are ELSS mutual funds?

ELSS funds are tax-saving investments that invest a majority of their corpus, at least 80% in equity and equity-related investments. Also known as mutual fund tax saver funds, ELSS mutual funds are eligible for a tax deduction of up to Rs1.5 lac under Section 80C of the Income Tax Act, 1961. By investing in ELSS mutual funds, an investor can save up to Rs46,800 each year. Thus, ELSS funds serve the dual purpose of tax-saving benefits and capital appreciation.

How to choose the right ELSS tax saving mutual funds?

Following are some of the factors that you can consider before investing in ELSS tax saving funds:

  1. Stop chasing top performers

It’s quite easy to fall for the top-performing funds. Such impulsive decisions areoften made based on annualised returns. However, there is no guarantee that the returns will be replicated in the future.

Moreover, a scheme which is a chart-topper todaymight slide to lower ranks in the subsequent period. Hence, instead of being dependent on the recent returns, consider analysing fund performance across multiple horizons.

  1. Analyse risk-return ratio

According to the risk-return principle, a higher risk is often compensated by a higher degree of returns. When you invest in ELSS funds, you need to look for its risk-return potential. The risk-reward ratiocan be ascertained by using the Sharpe Ratio. It shows how much extra returns the fund will fetch for the extra risk absorbed.

  1. Check the composition of the fund

A fund composition portrays about the kind of assets or securities a particular fund is made up of. A diversified equity fund like ELSS mutual fund invests in several securities across different industries and market capitalisation. One should note that thetcannot get rid of market risks. Its investment objective guides the portfolio composition of ELSS funds.

Before choosing to invest, an investor needs to match the fund’s risk profile with their own risk appetite. Thus, a risk seeker’s choice for ELSS fundsmight be completely different from a risk-averse investor.

You may end up investing in wrong ELSS funds due to a hurried selection. So, carefully analyse the funds before taking any investment decision. Investment in ELSS mutual funds ought to be a well thought out decision after considering all the factors. Always ensure that your investments are aligned to your financial goals, investment horizon, and risk profile. Happy investing!

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