How to select an ELSS?

If you are a mutual fund investor and looking to invest in equity-linked savings schemes (ELSS), make sure that you have done the basic research while selecting them. Since there is a lock-in period of 3-year, investors need to be extra cautious while picking ELSS scheme among the basket of tax saving funds. It is always better to select schemes with sizeable assets under management (AUM) from established fund houses.

Things to remember while picking up the right ELSS?

Analyse Risk Adjusted performance

Many of the investors prefer historical returns while selecting an ELSS. But historical returns won’t give an accurate picture of the current scenario, so the performance should be adjusted towards risk. Avoiding unnecessary risk while investment will be a good strategy for investors. Risk averse investors can choose Sharpe ratio as a tool to analyse the risk adjusted returns. According to our analysis below mentioned schemes are the best risk-adjusted performers. For this we have filtered all the ELSS schemes having AUM of more than Rs. 500 crores.

Analyse the consistency in the performance

Second and one of the most important aspects to look at while selecting the ELSS is the consistency in performance. With the risk-adjusted performance a scheme which is performing well in a longer term would be a better bet in the market. It is very important to look at the performance of an ELSS over and above three years, as usually these schemes have a lock-in period of three years. According to our analysis, below mentioned schemes are the best and most consistent performers in the past 5 years among all the ELSS schemes.

Investor tend to opt for the dividend options of tax-saving funds because there’s no lock-in for dividend declarations as well as they receive a portion of the investment back before the maturity of three-year lock-in period. However, its suggested that investor should go for the growth option for longer term horizon to benefit from power of compounding. Previously, the tax-free status of dividends was another perquisite for dividend plans, but with the introduction of Dividend Distribution Tax (DDT) on equity schemes in the recent Union Budget, this is no longer the case. So it is best to prefer the growth option of ELSS funds.