What is the meaning of an ELSS Mutual Fund?
Equity Linked Saving Scheme or ELSS comes under the diversified division of mutual funds. The funds are mainly invested in equity as well as equity-oriented securities. ELSS aims at giving the investors the dual advantage of capital appreciation along with tax savings at the same time. These funds come with a statutory 3 year lock-in period, which as we all know, is the shortest in comparison with all the80 C options.
Who must invest in an ELSS Mutual Fund?
Anybody can invest in ELSS – an individual or even an HUF. It is best suited for those investors who wish to avail tax benefits, those have a high-risk appetite, and also those who intend to stay invested in it for a long term. Young investors who have just begun their career could invest keeping in mind the long-term horizon and the best part is they have time to benefit from the power of compounding in addition to saving taxes.
Benefits of investing in ELSS Mutual Funds
a) It has the shortest lock-in period of just 3 years
b) They could give an investor returns that are way higher than the PPF or NPS.
c) The earnings are taxed at just 10% of the gains.
d) In these schemes there isn`t any maximum limit in terms of investment.
e) Investors do not need to have an in-depth knowledge of markets as these funds are managed by experienced and expert fund managers.
What are the options to Invest?
a) Growth Option
Under this, the investor does not get any benefits by way of dividends. He gains during redemption and this leads to NAV appreciation and multiplication of the profits. However, investors must be aware of the volatility of markets.
b) Dividend Option
Under this, an investor will benefit from timely dividends and these are tax-free. The dividend will be declared in times of excess profits. Effective next financial year – dividend income will get clubbed to your overall income at taxed at investor’s marginal rate and hence, this option going forward will not be useful for people in high tax brackets.
c) Dividend Reinvestments Option
Under this option, the dividends are reinvested by the investor and adds to its NAV. When the markets are good, this is a good option. This option should always be avoided as there is a chance of units gained as dividends getting stuck for 3 years in a cyclical way.
Points based on which the Best ELSS fund are evaluated:
a) History of the Fund
When you select a mutual fund house, opt for one which has a consistent performance over a period of about 5 years or 10 years. The performance reflected in the fund depends on the quality of its portfolio and that of the benchmark. If the fund`s performance surpasses that of the benchmark, it’s a decent choice to go with.
b) Returns of the Fund
You must compare the performance of the fund you have selected with that of its competitors. This will help you analyze its performance over the years.
c) Financial Parameters
You must look into various financial parameters like Sharpe ratio, the standard deviation, Alpha, Sortino ratio, and Beta as this will enable you to evaluate its performance. A fund that has a high standard deviation as well as a high beta is very risky in contrast to one which is is lower in these two aspects. Select a fund that has a high Sharpe Ratio as for every additional risk take, the fund offers a higher return.
d) The Expense Ratio
Expense ratio indicates the amount of the investor`s investment which is diverted to management of the fund. Always select a fund with a lower expense ratio as it indicates a higher return.
e) The Fund Manager
The person who manages the fund is known as the fund manager and he/she plays an important role in building the trust towards the fund. It is their competency skills as well as experience which builds confidence in the investor, as selecting the right stocks to create a powerful portfolio is what makes the mutual fund deliver a high return.
We have learnt that running behind returns is very futile. When you embark on the journey of investment, it is important to remember that you cannot stay with only a single top performer in the entire journey. Each and every scheme has its own share of ups and downs and you must allot sufficient time to the schemes so that they can perform. Once this is done, you can decide on which scheme remains and which scheme moves out of your portfolio. We have come up with a list of few schemes and this has been done post a research on various schemes that are available in the market.
1. Axis Long Term Equity Fund(G)-Direct Plan
Jinesh Gopani has been managing this fund since the year 2013.
2. Tata India Tax Savings Fund(DP)-Direct Plan
The fund is being managed by Rupesh Patel since 2015 and Ennette Fernandes since 2018.
3. Motilal Oswal Long Term Equity Fund(G)-Direct Plan
Aditya Khemani is the fund manager since 6 September 2019.
4. Aditya Birla SL Tax Relief `96(ELSS U/S 80C of IT ACT)(D)
Ajay Garg has been managing this fund since October 2006.
5. ICICI Pru LT Equity Fund (Tax Saving)(G)-Direct Plan
The fund was managed by Harish Bihani and Sankaran Naren since 5 November 2018.
The tables below shows the annualised return as well as the various financial parameters of these funds:
|Fund Name||3-Year Returns (%)|
|Axis Long Term Equity Fund||15.45|
|Tata India Tax Savings Fund(DP)-Direct Plan||11.85|
|Motilal Oswal Long Term Equity Fund||10.85|
|Aditya Birla Sun Life Tax Relief 96||10.47|
|ICICI Prudential Long Term Equity Fund||7.91|
Risk Return Matrix (data as per 31 Jan 2020)
|Fund Name||Return (in % measured by mean returns)||Risk (in % measured by standard deviation)||Sharpe Ratio||Beta||Expense (as of 31.12.2019)|
|Axis Long Term Equity Fund||17.15||12.90||0.89||0.91||0.92|
|Tata India Tax Savings Fund(DP)-Direct Plan||13.91||13.95||0.59||1.03||0.62|
|Motilal Oswal Long Term Equity Fund||14.06||12.65||0.66||0.85||0.83|
|Aditya Birla Sun Life Tax Relief 96||11.75||12.95||0.47||0.93||2.01|
|ICICI Prudential Long Term Equity Fund||10.84||11.41||0.45||0.83||1.25|
Please note that the ranking of funds does not suggest any kind of recommendation. An investor can choose a fund based on his/her goals. Also note that returns are subject to changes.
So, whenever you decide in an ELSS Mutual Fund, firstly you must remember that you must stay in such schemes for a minimum of 5-10 years to reap the benefits of high returns, though these schemes are well known and popular for their short lock-in period of just three years. If you are a youngster who has just begun your professional career and wish to avail tax benefits along with a good return in the future, ELSS schemes are perfect. Also, make sure you include the investments in ELSS in your financial plan right from the beginning as this will enable you meet the financial goals.
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