Key Pointers to Pick ELSS Funds Wisely

Looking for tax-saving investment instrument with a high earning potential over a long-term horizon? Consider parking your money in Equity Linked Savings Schemes (ELSS). The diversified and open-ended mutual funds with a 3-year lock-in period offer high returns along with tax rebate under section 80C of the Income Tax Act. While there's no denying that ELSS is a better performing asset class and a popular investment choice, picking an appropriate fund from the umpteen options available can be confounding. Hence, there is a need to exercise caution and do some basic research. Read on for five key points that can help you make an informed decision.

• Analyse Consistency in Performance: Investors can get swayed by a fund's recent performance. Merely making a beeline for the latest chart-topper is not prudent as there is no surety the performance will be replicated in the future. It's essential to dig deeper and evaluate the fund's track record over the last 4-5 years to get a clearer perspective. An ELSS product that exhibits consistent performance during the ups and downs of the market dynamics is a good bet.
• Assess Risk-Return Trade-off: The investment comes with an element of risk, and if returns are not in proportion, it may not be worth it. The trick is to look for risk-return potential by using the Sharpe Ratio measure. It shows the returns generated by a fund for the additional risk taken. A scheme within the same risk category flaunting a higher Sharpe Ratio is deemed superior. It is likely to offer better compensation for the risk assumed than a lower listed fund.
• Pay Attention to Composition of Funds: ELSS investments are made across a range of different sectors and market capitalisation. It's the job of the fund manager to ensure a well-diversified portfolio to balance the related risk quotient. A look at various portfolios will reveal that they are not identical, and some funds lean towards particular stocks compared to others. It's important to pay attention to the overall nature of the portfolio and opt for a fund (aggressive vis-à-vis conservative) that matches your temperament, risk appetite, and financial goals. Avoid Multiple ELSS Products: Refrain from buying a new ELSS plan each year. This can lead to a large portfolio and excessive diversification, which can drag returns and make the task of monitoring the funds quite cumbersome. Ideally, you should put money in just a couple of funds with a good track record and stick to them year on year.
• Invest in Growth Option: A large number of investors opt for the dividend option because they receive a part of the investment before the mandated three-year lock-in tenure ends. Experts, however, recommend the growth alternative wherein the profit is reinvested, and you can reap the benefits of compounding over the long term.

Thanks to the dual benefit of wealth creation and tax saving, ELSS funds are considered the smart way for newbies to embark on their equity journey. But you need to bear in mind that ELSS is a long-term investment with a lock-in period and choosing the right fund is thus crucial. So, what are you waiting for? Carefully examine the parameters mentioned above to zero in on a fund that is in sync with your risk profile and investment objectives. You don't want to be stuck with an under-performing scheme for three years now do you?