Become an informed and insightful investor by learning how to select the best tax saver mutual fund for oneself through assorted aspects of the mutual funds.
Equity Linked Savings Scheme (ELSS) is a category of mutual fund which provides tax benefits to the investors by investing the corpus in the stock market. These funds have a lock-in period of 3 years and generally provide better returns than any other tax saving options available under section 80C. Top ELSS funds are provided by several AMCs in India. These funds allow investors to reduce the tax liability of up to Rs 1.5 lac per financial year. The best ELSS funds allow wealth creation over long-term along with tax savings in lowest lock-in period. The convenient option to invest monthly through SIP adds a cherry on the cake.
To gain better returns over the long term, it is essential to select the best ELSS mutual funds to invest. Every fund has a different investment strategy and is managed by different managers, hence every investor must check all the important aspects to choose the foremost ELSS mutual fund to be a successful investor.
The performance of the fund in the past is an important factor to consider while choosing the best ELSS plan. It should be deeply analysed by comparing it with the performance of the benchmark and category’s average. How did the fund perform in the positive and negative phase of the equity market, should also be checked. Top ELSS funds should be consistent performers in at least 5 years in the past.
The investment and stock selection strategy of every ELSS plan is different. Due to this, there is a lot of variation in the performance of the ELSS funds. It must be checked how volatile the fund has been in the last 3 to 5 years. The fluctuations can also be compared with the benchmark for better assessment of ELSS funds.
All equity schemes possess market risk but what returns have been provided at the expense of the risk taken, separates the best ELSS mutual funds from the ordinary ones. The risk to reward ratio can be measured by Sharpe and Sortino ratios. These ratios can also be compared with the ratios of the benchmark and category average.
ELSS mutual funds invest in a variety of stocks. There is no obligation on the fund manager to stick to any of the sector, size, or investment style. Due to this, the strategy of the fund manager plays a vital role in the performance of ELSS mutual funds. A highly qualified and experienced fund manager can handle the portfolio well for an ELSS fund. Investors must consider how the manager performed in the ups and downs of the market and the performance of other funds managed by the same manager before making a choice.
Investing in the best ELSS mutual fund is the most convenient and beneficial method to reduce tax liability and earn capital appreciation due to the following reasons:
1. It has a lock-in period of 3 years which is the lowest among all the available options under section 80C.
2. Long term wealth can be created by disciplined investment in ELSS funds.
3. The ELSS funds provide the highest returns compared to any other tax saving tools like PPF, NPS, etc.
4. The investment can be done through a systematic investment plan (SIP) due to which, investment becomes burden free.
5. Various benefits of SIP such as rupee cost averaging and the power of compounding can be grabbed which reduce the risk and increase the returns.
6. The market updates and research are not required as the investments are done by the fund manager.
7. There is no limit to invest but the tax deductions of maximum Rs 1,50,000 can be claimed if that amount is invested in ELSS funds.
8. Investment can be started with a minimum amount of Rs 500.
Tax saving is a serious concern for a majority of earning individuals. The 2019-20 budget has given relaxation to many residents but with smart and informed investment technique, tax deductions can be further stretched. The best ELSS funds can help an individual to save tax via SIP investment which is burden free and by choosing the right scheme, one can earn significant returns.
ELSS funds are a blessing for those who seek tax benefits with investments. The best ELSS mutual funds allow investors to reduce tax liability and earn significant returns on the invested amount. ELSS is the most beneficial and convenient method of tax savings under section 80C of the Income Tax Act. Multiple benefits of the best tax saving mutual funds can be grabbed if the investments are safeguarded with proficiency in ELSS mutual funds.
ELSS mutual funds invest in equities and are prone to market volatility. However, after the lock-in period of 3 years, the returns are most likely to be profitable. The investment must be made for at least 5 years to grab high returns from the best ELSS funds. Even if the lock-in period is of 3 years, those who are looking to invest for less than 5 years should not choose ELSS funds. It is the most convenient and beneficial tax saving opportunity and can be grabbed by every individual who is liable to pay taxes. Those investors who cannot take the risk in the equity market should not invest in the ELSS funds as these schemes can be highly volatile and do not guarantee returns. These funds are also not suitable for those who are in the late 50s and are likely to take retirement in the next few years. The retirees and senior citizens should avoid investing in ELSS funds. PPF, NPS, LIC, etc., are some of the other options which can help a conservative investor to reduce tax liability. The returns in the other tax-saving strategy are quite lower than that of ELSS mutual funds.
Even the best ELSS mutual funds in India possess the risk of equity market but if an informed investment is made while taking care of all the concerned aspects, two targets of tax saving and wealth creation can be hit by a single shot. Investments in top ELSS funds must be done after checking all the details of the fund. Those investors who cannot take out time from their schedule for the research and analysis can take the assistance of financial experts.
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