Choosing an ELSS fund
The following factors need to be analysed before making a decision to invest in an ELSS fund:
- Examining the fund returnsWhen trying to choose an ELSS fund to invest in, examining the funds returns play a crucial role. While high-performing funds seem like an obvious choice, it is important to analyse the consistency of the fund's performance. Additionally, the returns should be analysed based on the investment horizon of the investor.
- Fund compositionThe assets and securities in which the fund invests can give the investor a clearer picture of how their capital will be invested and the market risks that they will be exposed to. Diversification in the investment portfolio and the type of equity instruments in which investments are made can be a fairly accurate way to analyse the risk profile of the fund. An investment can be made based on whether or not the fund portfolio matches the investor's risk tolerance.
- Risk-return frameworkThe Sharpe Ratio is a sound way to analyse a fund's risk-return potential. Ideally, a fund that has a higher risk exposure should also earn higher returns. A high Sharpe Ratio implies that the risk assumed by the investor will be compensated accordingly.
How to Invest in ELSS
The following are the steps to invest in ELSS:
- The first step to investing in an ELSS fund is to determine the amount of income that is taxable and the tax slab under which it falls. This step can help determine the amount that one can invest to claim tax deductions.
- Choose a fund to invest in after analysing the performance of the fund, risk tolerance of the investor and the investment horizon.
- Choose an intermediary to assist with the investment process. Investments can also be made directly through mutual fund houses, but intermediaries assume all responsibilities of the investment, including the paperwork. KYC-related documents and in-person verification will have to be completed before the investment is made.
- Pick the payment mode for the investment-lump sum or SIP.
- After the investment is complete, the investor should obtain a statement of accounts from the Asset Management Company (AMC) as proof of investment.
As previously stated, investments made in equity instruments carry a higher level of risk than other types of mutual fund investments. ELSS funds are a good way of minimising an investor's risk exposure while also obtaining high returns. The added benefit of obtaining tax deductions on the investment and the tax-free earnings further add to the appeal of an ELSS investment. These factors, among many others, are the reason for the growing popularity of ELSS fund investments.