Out of many options available to an investor, an ELSS or equity-linked savings scheme comes with the shortest lock-in period. The ELSS mutual fund offers high returns, it has higher risk compared to other avenues like PPF, life insurance policies etc. Here is a look at smart ways to invest in ELSS mutual funds to minimise the risk of investing.
Grab the sip advantage
Don’t invest in ELSS at one go at the end of the year. These are equity schemes and monthly SIPs are the best way to invest in these funds. But if you start in January, you can fit in only 2-3 SIPs before the end of the financial year. “Ideally, a taxpayer should start an SIP in an ELSS fund from April through the whole financial year so that he does not get worried by the volatility,” says Raj Khosla, Managing Director of MyMoneyMantra.com.
Check long-term performance
Don’t be guided by the short-term performance of a scheme. Look at the long term record before investing. “Investors should not only look at 5-7 years performance of a scheme but also how long the fund manager has been at the helm of the fund,” says Aditi Kothari, Vice-Chairperson and Head of Sales and Marketing, DSP Investment Managers.
Assess portfolio attributes
Not all ELSS funds are alike. Some portfolios are focused on large-cap stocks while others have a good mix of large, mid and small caps. The portfolio mix also determines the risk and the rewards for investors. We have placed the top ELSS funds into three broad categories. Choose a fund that suits your risk appetite.
Don’t go for dividend option
Tax rules have changed in the past two years. Dividends are now taxable, as are long-term capital gains beyond Rs 1 lakh. While it is possible to manage and adjust the tax on capital gains, the dividends are added to income and taxed at normal rates. So, don’t go for the dividend option in your ELSS fund.
Keep monitoring performance
While holding equity funds for long periods is a good strategy and helps build wealth in the long term, investors need to monitor their portfolios as well. Some of the ELSS funds in Roshan Aswani’s portfolio have not done too well. HDFC Taxsaver and SBI Long-Term equity are long-term underperformers that should have been dumped some years ago.
Which ELSS fund is for you?
ELSS funds come in different flavours. Pick the one that suits your taste
Very high risk: With over 40% of their corpus in mid-and small-cap stocks, these funds can be very rewarding in bullish times. But watch out for the volatility.
High risk: These schemes also have 30-35% exposure to mid-and small-caps. They will be less volatile but can be equally rewarding in rising markets.
Moderate risk: These schemes have 75-80% of their corpuses in large-cap stocks so will not be very volatile. But returns will also be relatively sedate.
Data as on 12 Apr 2022 | Source: Value Research
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