Best ELSS Mutual Funds are the best Tax Saving Mutual Funds. Section 80C of the Income Tax Act, 1961, allows investors to claim deductions up to Rs 1.5 lakh a year. Tax deductions provide an opportunity for investors to invest the majority of their income or savings in equity.
1. What are ELSS Mutual Funds?
Equity Linked Saving Scheme falls under the diversified category of mutual funds
. While their maximum exposure is in equity and equity-oriented securities, a part of the corpus is also parked in debt. ELSS aims at providing the dual benefit of capital appreciation and tax savings, simultaneously. These funds have a lock-in period of three years which is the shortest among all 80 C options.
2. Who should invest in ELSS Mutual Funds?
Any individual or HUF can invest in ELSS. It is suitable only for those who have enough knowledge and appetite to take risks and stay invested with a long term perspective. Young investors in the initial years of their professional career can invest with a long-term horizon. ELSS is best suitable for young investors as they have time on their side to unleash the power of compounding to the fullest to enjoy high returns while saving on taxes of up to Rs 46,800 a year.
3. Advantages of ELSS Mutual Funds
a) The lock-in period of three years is the shortest of all Section 80C avenues.
b) ELSS mutual funds have the potential to offer much higher returns than other tax saving instruments such as PPF or NPS.
c) Earnings are taxed only at 10% of the gains.
d) There is no maximum limit to invest.
e) Investors need not have in-depth knowledge of the markets. Mutual funds are managed by professional fund managers who have the unmatchable experience, and they work towards maximising the return on your investment.
4. Options for Investing in the Best ELSS Mutual Funds
a) Growth Option
Under the growth option, the holder will not receive benefits in the form of dividends. The investor gets the gains at the time of redemption, and this helps to appreciate the total NAV and thus multiplies the profits. The only caution here is that the returns are subject to market risk. Markets might not work in the investor’s favour every time.
Under this option, an investor gets timely benefits in the form of dividends which are completely tax-free. The dividend is declared only when there are excessive profits, over and above.
c) Dividend Reinvestments Option
This is an option under which an investor reinvests the dividends received to add to the NAV. This is a good option, particularly when the market is playing well and is likely to continue the same way.
5. How to evaluate the Best ELSS Mutual Funds
a) Fund Returns
Compare the fund performance with the peer competitors to ensure that the fund has been consistent over the past years. Based on these parameters, an investor can invest in the recommended funds.
b) Fund History
Choose fund houses that have performed consistently over a long period, say five years to 10 years. A funds performance is reflected based upon the quality of stocks in its portfolio and benchmark. If a fund outperforms its benchmark or the stocks are of higher performance, then the fund delivers high returns.
c) Expense Ratio
Expense ratio depicts how much of your investment goes towards managing the fund. A lower expense ratio translated into higher take-home returns. Needless to say, you need to choose that fund, which has a lower expense ratio.
d) Financial Parameters
Consider various parameters such as Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta to analyse the performance of a fund. A fund having a higher standard deviation and beta is riskier than a fund having a lower deviation and beta. Choose funds having a higher Sharpe Ratio as they offer higher returns for each additional risk you take.
The person who is managing the fund plays a key role in building fund trust. The fund manager plays a vital role as his competency skills and experience helps to build confidence as picking up the right stocks and creating a strong portfolio is what helps the fund to deliver high returns.
6. Top 10 Best ELSS Mutual Funds
While selecting a fund, you should analyse and compare different parameters of various funds before choosing one. Also, investing depends on an individual’s financial goals, investment horizon, and risk appetite. The following table shows the top-performing ELSS funds based on the past three years returns.
*The order of funds do not suggest any recommendations. The investor may choose the funds as per their goals. Returns are subject to change.
Investing in mutual funds might be a cumbersome task for an amateur investor. In case you are finding it difficult and not able to decide which fund is the best for your requirements, then reach out to us. We offer only handpicked funds from experts.