ELSS funds are known for their ability to appreciate capital while providing tax benefits. But similar to other mutual funds, there exists a lot of options when choosing an ELSS fund. Hence, it is important to consider certain parameters while choosing an ELSS fund. Read on to find out more.
Check the long-term returns of the fund over 3-, 5- and 10-year periods. ELSS funds have a lock in period of 3 years, so a long-term performance track record is important. Compare the fund’s returns against its benchmark and other ELSS funds in the same category.
Check the fund’s exposure across different sectors. A well-diversified portfolio across various sectors and companies will help manage risk better.
Check if the fund has delivered consistent performance across market cycles. Consistency shows the fund manager’s skill and the robustness of the investment strategy.
The expense ratio indicates the fund’s operating costs. Choose funds with relatively lower expense ratios. Every 1% increase in expense ratio can reduce your returns by at least 1%.
Reputed fund houses tend to have more experienced fund managers and better risk management processes in place.
Check if the fund allows you to make additional investments and switch between growth and dividend options as per your needs.
Choose funds with reasonable minimum investment levels to make the most of your tax savings. Most ELSS funds have a minimum investment of Rs. 500 to Rs. 1,000.
Asset Under Management
Funds with higher AUM tend to have more liquidity and stability. However, very large funds may also face challenges deploying that amount effectively.
Understand whether the fund follows a growth, value, blend or sector-specific investment style. Choose a style that matches your risk profile and investment horizon.
How to compare the performance of different ELSS funds?
Apart from the above-mentioned points, compare the Sharpe Ratio and Standard Deviation of the funds to determine their risk-adjusted returns. Investigate the funds’ performance across different market caps (large, mid, and small) to gauge the fund manager’s asset allocation skills and
examine the performance attribution by sector allocation to identify the source of returns.
Check for high correlation between the fund’s performance and the broader market to determine the distinctiveness of the fund’s strategy. Finally, review research reports and ratings from credible rating agencies that analyze funds based on various performance metrics. By considering all these factors, you can shortlist top-performing ELSS funds that have consistently outperformed their benchmarks and peers while managing risk effectively over the long term.
A combination of fundamentals like performance track record and portfolio diversification along with other parameters like expense ratio, fund house reputation, flexibility and minimum investment requirements should help you shortlist the best ELSS funds for your tax savings and investment goals. Do adequate research and analysis before making your final choice.