How to choose the right ELSS scheme?

ByAmrina Alshaikh

Thinking of choosing an equity linked savings scheme? You should make sure that your choice is spot on, going by multiple parameters. Since the lock-in period for ELSS investments is 3 years, you should be vigilant when choosing a suitable scheme to invest in. Choose those plans which have considerable AUM (assets under management) and are offered by reputed mutual fund firms/houses as per experts.

Studies have highlighted that returns from these ELSS tax saving funds have been steady over the last few years, standing at approximately 10.51% over the holding period of 3 years, multiple schemes have not done as well too. Open-ended ELSS funds offer investors the freedom to withdraw their money after the initial 3-year lock-in period. Closed-ended ELSS funds may have lock-in periods going up to 10 years as well. These should be avoided according to financial experts.

Tips on choosing the right Equity Linked Savings Scheme

Here are a few handy tips that will help you choose ELSS mutual funds that deliver the best returns while being aligned to your financial needs.

  • Always look at returns generated historically over a sustained time period while adjusting earlier performance for risks. Choose funds which offer better returns in a risk-adjusted mechanism. Analyze fund performance over longer periods like 5-6 years or so.
  • Check out the Information Ratio which is another version of what we call the Sharpe Ratio. The former is what really tests the abilities of fund managers and helps you assess parameters which are adjusted for risks.
  • Opt for ELSS schemes which have delivered returns consistently and you can consider splitting returns over 5 years into annualized returns for each year. Then, compare the same against the category average rate and benchmark rate.
  • The fund that you choose should have the potential to generate returns which are superior to benchmarks in rising markets and should be falling lesser in a market that is falling as well.
  • Choose funds in the top list amongst those with almost the same portfolios.
  • Experts also advise splitting ELSS investments into a couple of funds or even three.
  • Dividends may seem lucrative for several investors since they receive some portion of the investment back before the expiry of the lock-in period. However, choosing a growth option will help you benefit from sheer compounding. DDT (dividend distribution tax) has already been introduced and this takes away the previous benefit of tax-free dividends as well.

Additionally, when it comes to investing in equity linked savings schemes, opt for longer lock-in periods to get maximum benefits. SIPs will help you profit from rupee cost averaging benefits. Align your investment in ELSS schemes with your financial goals after taking into account other expenditure including loan repayments, household necessities, insurance premium and NPS/PPF contributions.

Keep in mind that LTCG (long-term capital gains) from these investments will be taxed at 10%. Compare your ELSS scheme to other equity funds in your portfolio for avoiding any chances of duplication. Choose schemes carefully on the basis of the above mentioned parameters and also get handsome tax planning benefits since these investments are subject to Section 80C deductions up to Rs. 1,50,000.