ELSS is undoubtedly an excellent option for young & first-time investors who want to save tax and also grow their wealth over the long term. However, the available options nowadays in the market are enough to drive even seasoned investors crazy.
And the tons of articles available on the internet like “TOP 10 ELSS FUNDS FOR 2021” add to the confusion for a new investor. And this confusion makes several new investors skip investing altogether or make them invest in tax-inefficient products. Unfortunate, isn’t it?
Also, selecting the wrong ELSS fund can cost a lot in the long term. For example, over the long term, the best performing ELSS has delivered 19%. In comparison, the worst-performing one as delivering a measly 13% – note the difference!!
At Finbingo, we believe in empowering our readers.
As an investor, if you have the proper understanding of the various parameters & a CLEAR PROCESS to select the proper schemes, you would not need to depend on anyone else.
In this post, we are sharing with you 4 checkpoints you can use to select the best ELSS fund for your needs. So, read on!
Checkpoint # 1: Investment Philosophy & Credibility of the Fund house & Fund Manager
When you read in the media that so and so the scheme is performing so well and giving excellent returns, you are naturally tempted to invest in it, isn’t it? But here you need to understand that what is hot this year may turn out to be the dud of next year.
Remember: ELSS is a long-term investment. When you are planning to invest your hard-earned money, you can take care of the following points:
- Ensure that the fund house is sufficiently old & reputed & also has multiple well-performing schemes in its portfolio.
- Check the credentials of the fund manager, the person who will be managing the fund. See his tenure with the fund house & his overall track record of managing multiple schemes
- Check the scheme’s history & preferably invest in a scheme that is at least 5 years old. This will give a good idea of investment performance. Avoid new fund offers at all costs.
Checkpoint # 2: Compare the Risk-Adjusted Return (RAR)
Let’s take an example: We have two ELSS schemes A & B. Scheme A earns 30% while other earns 10%.
So, on the face of it, Scheme A looks better-off, isn’t it?
However, for earning this return, Scheme A took 5 units of risk & scheme B took only 1 unit of risk. So, in simple terms, the Risk-Adjusted Return of Schemes A & B are 6% and 10% respectively.
Now ask yourself: Which scheme is better?
Financial ratios such as Sharpe Ratio are readily available online & can help you compare schemes on risk parameters & help you make an informed decision.
Checkpoint # 3: Portfolio Allocation & Turnover
It pays to look at the scheme portfolio allocation into a market cap of companies & sector-wise allocation. Also, check on the portfolio turnover ratio. See if it is aligned to the investment objective of the scheme. Select a fund that meets the following parameters:
- Sticks to its investment objective in changing market cycles.
- Has a decent allocation to large caps & reasonable spread across sectors – this gives the necessary stability to the fund’s portfolio & protects returns in sharp down cycles.
- Has a reasonably concentrated portfolio instead of a diversified portfolio that mimics the index – this will help the fund beat the benchmark & generate superior returns over the long term.
- Has a low portfolio turnover – this reflects the conviction of the fund manager in his stock picks.
Checkpoint # 4: Expense Ratio
The fund management charge is the fee that you pay to the fund manager for managing your money. This charge has a direct impact on your return from your ELSS investment. You can quickly obtain this detail on the mutual fund website.
As compared to new schemes which have a smaller investor base, this charge is less for older & established schemes as it gets spread across the large investor base. This makes it one more reason to invest in established schemes.