- Date : 13/07/2022
- Read: 3 mins
Over the last 10 years, the ELSS category has delivered an average return of 15%.
As the new financial year rolls in, the month of April is the best time to get started on your tax planning for the year ahead. Each year, the IT department allows a tax deduction of up to Rs 1.5 lakh under Section 80C towards certain investments. ELSS mutual funds are among the best options to take advantage of this tax break, while also building savings and giving your capital an opportunity to grow.
ELSS stands for Equity-Linked Savings Scheme, which is a specific category of mutual funds exclusively designed to take advantage of the benefit available under Section 80C. ELSS investments come with a lock-in period of three years, before which withdrawals are not allowed. However, this lock-in period is the shortest compared to other tax saving instruments.
The fund invests in a portfolio of stocks and carries the potential for higher returns compared to other fixed-income investments such as PPF, NSC and other small savings schemes. But the risk is higher as well, owing to the nature of the investment. Over the last 10 years, the ELSS category has delivered an average return of 15%. It is recommended to stay invested in any equity product for at least 7-10 years to tide over volatility and see substantial gains.
Also Read: Exit Strategies for ELSS
How to select the best ELSS funds to invest in 2022
Investors can choose from about 80 different ELSS funds offered by various AMCs in India. Here are some parameters you can use to evaluate the best ELSS mutual fund for you:
- Portfolio: Even though ELSS funds are broadly classified as equity-oriented funds, the portfolio mix will tell you the fund style and risk profile - whether it is conservative, moderate, or aggressive. It is important to evaluate and select an ELSS fund that suits your risk tolerance.
- Assets Under Management (AUM): Investors tend to choose closed-ended ELSS funds over open-ended funds solely for the tax benefit they provide. However, if the fund performs well, investors will continue to stay invested and deploy additional funds each year. Even though redemptions are unavoidable, a progressive increase in AUM is a sound indicator of a good fund.
- Vintage and performance: An ELSS fund that has been around for longer has witnessed multiple cycles of volatility and variance in returns. Investors need to evaluate returns over a period of 7-10 years to get a fair idea of the funds’ performance vis-à-vis the benchmark index and its peers.
- Consistency and downside risk: Analysts use certain mathematical models to evaluate funds. While there’s no need to know the exact math behind the models, it helps to add more parameters for you while you make an informed choice. The data on consistency and downside risk, for example, is readily available online.
Top ELSS funds to consider
Also Read: Debunking 7 Myths About ELSS Mutual Funds
Do bear in mind that past performance is not necessarily indicative of future results!