How to Choose the Best ELSS Fund and Build Wealth

When it comes to investing, you’re frequently faced with questions concerning which products will be the most profitable for you. Equity-Linked Savings Schemes, also known as ELSS, are a financial vehicle that may help investors earn profits while also saving money on taxes. It’s a diversified equity scheme that helps you achieve long-term financial goals while also allowing you to deduct up to Rs 1.5 lakh in investment expenses under Section 80C of the I-T Act. ELSS has a three-year lock-in period that prevents you from redeeming or switching plans. As a result, picking the ideal strategy for yourself becomes critical if you want to achieve your goals.

Here are five considerations to keep in mind when picking an ELSS that aligns with your risk tolerance and financial goals.

Market Cap Composition Of The Portfolio

ELSS funds are similar to multi-cap schemes, which include a mix of small, mid, and large-capitalization equities.  On the other hand,  ELSS allows fund companies to increase the concentration in a single stock by a certain amount. An ELSS fund with a higher weighting in large-cap equities tends to have a more steady return/risk ratio.

If you invest in mid- or small-cap stocks, your ELSS will be more volatile, incur a larger risk and have the ability to produce a bigger return. You should choose the suitable mutual fund schemes to help you meet your financial goals on time depending on your return demand and tolerance for risk.

Understand The Concentration Risk And Over-diversification

Diverse ELSS funds use several strategies to accomplish a well-balanced portfolio with respect to stock concentration and diversification. Some funds may place a greater emphasis on a smaller number of stocks, while others may use a diversified portfolio and place an approximately equal amount of money in each of the stocks in their holdings.

For illustration, Fund ABC  has 100 equities in its portfolio, with 5% of those stocks representing 25% of the fund’s overall corpus. These funds have a high degree of concentration and are subject to a high degree of volatility risk. Here’s another illustration to help you better grasp the concept. The corpus of Fund ‘XYX’ is evenly allocated among 100 stocks in its portfolio. That’s a very well- diversified portfolio. Over-diversification reduces the fund’s ability to generate returns and may fail to provide a fair return even in a bullish market, whereas a concentrated portfolio involves a high level of risk.

Focus on ELSS funds that are neither overly diversified nor overly focused when choosing one. Simply, prefer a fund that has an adequately diversified portfolio.

Check The Expense Ratio Of The ELSS Fund

The expense ratio measures the whole cost of administering the fund, including management fees and expenses. A higher cost-to-income ratio reduces your return on investment by that much. When investing in an ELSS fund, search for a mutual fund scheme with a reduced fee ratio; nonetheless, the fund’s total performance should be at or above the category return.

Check The Basic Parameters

You should also look into certain important fundamentals, such as the fund’s past performance and the reputation of the fund management. Although past performance does not guarantee future results will be the same, it can be used to estimate the fund manager’s ability to manage the fund in different market conditions. Similarly, if the fund manager consistently performs well over a long period of time and there is no significant change in the fund manager, it could indicate that such a mutual fund scheme will repeat its success under identical market conditions.

Compare The ELSS Fund With Other Equity Funds You Have Invested

Check your existing mutual fund investments before investing in the ELSS fund to prevent duplicating their portfolio structures and investment styles. A better return on your investment can be ensured by investing in several types of ELSS funds.

Finally

If you’ve never invested in a mutual fund before, seek the advice of an experienced investment advisor or go through a mutual fund distributor. For those who know a lot about mutual funds and can pick the proper one, a direct investment in them may be preferable. Whatever ELSS plan you choose, be sure to stick with it for the long  period if you want to create wealth.