The following are things to bear in mind while picking an ELSS appropriate for your risk tolerance and financial objectives.
Keep an eye out for any mutual funds you already own and don’t copy their portfolio structures or investment strategies.
While beginning on an investment journey, you are often met with questions concerning the appropriate products for you. Equity-Linked Savings Schemes, often known as ELSS, is an investment strategy that may benefit investors in terms of both returns and tax savings. In addition to helping you reach your long-term financial objectives, this diversified equities plan allows you to deduct up to Rs 1.5 lakh in investment expenses under Section 80C of the I-T Act. A mandatory three-year lock-in term for ELSS implies that you cannot redeem or switch during this time. To get the best results, you must choose the ideal strategy for yourself.
Consider the following when purchasing an ELSS to match your risk tolerance and financial goals and objectives.
1. The Portfolio’s Market Cap Composition
Small, medium and high capitalization stocks are all represented in ELSS funds. On the other hand, ELSS allows fund houses to concentrate more heavily on a single company with a particular market capitalization. Investments in large-cap stocks tend to be more steady in terms of risk and return. However, ELSS with more exposure to mid or small-cap companies are more volatile, riskier, and have the potential to create a bigger return. To meet your financial objectives, you should choose mutual fund schemes based on your risk tolerance and return expectations.
2. Be aware of the risks of over-diversification and concentration risk.
To maintain a well-balanced portfolio, various ELSS funds use a variety of methods, including stock concentration and diversification. If you’re looking to diversify your portfolio, you may choose to invest more in a few specific companies, while others may want to invest in a wide range of equities.
Fund Xyz has 100 equities in its portfolio and 5 percent of those stocks make up 25 percent of the fund’s total assets. This kind of fund has a high degree of concentration and a significant degree of risk. Another example will help us better grasp this concept.
There are 100 equities in the fund XYX’s portfolio and the corpus is equally allocated among them. That’s a well-diversified investment strategy. An over-diversified fund may not be capable of providing a satisfactory return even in a bullish market since it dilutes the fund’s return-generating power.
You should look for an ELSS fund that is neither too diversified nor too focused. Prefer a fund with a well-balanced portfolio, plain and simple.
3. Examine the ELSS Fund’s Expense Ratio.
The expense ratio is a measure of the fund’s operational costs, including management fees and other costs. The lower your return on investment, the greater the impact of a larger expenditure ratio. The smaller the expense ratio of the mutual fund scheme, the better the fund’s overall performance should be in terms of Equity-linked savings funds investments.
4. Check the Basic Parameters.
You should also look at the fund’s history, the repute of the fund management, and other important fundamentals. Even though a fund’s past performance does not guarantee that the fund’s future results will be the same, this information may help you determine how well the fund’s management can handle a variety of market scenarios. The same may be said about the performance of a mutual fund if the fund management consistently performs well over a lengthy period and there is no substantial change in the fund management team.
5. If You’ve invested in other equity funds, compare the ELSS Fund to other investments.
Keep an eye out for any mutual funds you already own and don’t copy their portfolio structures or investment strategies. Diversifying your portfolio with several ELSS funds can improve your chances of a higher return on your investment.
If you are a novice investor, you might like to seek the advice of an experienced investment advisor or a mutual fund distributor to assist you to get started. The key to building wealth with an ELSS strategy is to remain with it for as long as possible.