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How to choose the right ELSS mutual fund scheme for tax saving investment

It is that time of the year again. With very little left to make investment decisions, Nayan is contemplating his tax saving plans for the financial year. He holds some investments in Equity-Linked Saving Schemes (ELSS), which fall among the instruments that are eligible for tax deduction under Section 80C. This is an important provision as one can claim up to Rs 1.5 lakh deduction under this section. He is contemplating adding some more investments in this category across some new funds but is wondering how he should zero in on the fund and the fund house.

While there are several other options under 80C such as PPF, National Saving Certificate (NSC), bank tax-saving deposits, and life insurance, ELSS has also grown into a popular instrument. ELSS clearly has a dual benefit and Nayan’s previous experience with respect to returns on his existing investment bears testimony to the fact that as an equity mutual fund scheme, ELSS has not only helped him bring down his tax liability but also create wealth over the long term. The scheme has performed well and the overall performance of equity markets during his holding period of the past three years has been stupendous. Nayan should carefully evaluate and select an ELSS that suits his risk profile, as well as return expectations. He must choose based on his overall portfolio construct and select a fund that helps him diversify from the perspective of fund management–aggressive, moderate or conservative; market capitalisation universe–large, mid, small or flexi; and investment style–growth, value or blend.

Also read:
Best ELSS mutual funds for tax saving investments now

As it is an equity-linked product, ELSS can go through periods of sharp volatility and investment returns can see sharp fluctuations in the short to medium-term horizon. Even though factsheets declare three-year returns, Nayan must evaluate based on the long-term track record— 5 to 7 years. Such data is easily available on multiple platforms providing mutual fund analytics.

He should refrain from adding multiple ELSS to his existing portfolio and spreading his investments across a spectrum that may get difficult to track and review on a regular basis. Instead, he should add one or a maximum of two new funds and then make incremental investments in the existing portfolio annually, unless a review throws up the need for a change or replacement. This would essentially amount to a SIP in the funds which would augur well for his overall return on investment and wealth creation.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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