The Mutual Fund Show: Are ELSS Funds The Right Choice For Tax Saving?

If you invest in an equity linked savings scheme, in addition to equity-linked growth, you can claim a tax rebate of up to Rs 1,50,000 under the provisions of Section 80C of the Income Tax Act, 1961, said Aditya Nain, author, professor and creator.

Investors should look at it as an open-ended equity investment with a more than three-year horizon, according to Kalpesh Ashar, certified financial planner at Full Circle Financial Planners and Advisors, as well as a registered investment adviser.

"ELSS is good for early-stage professionals," said Nain. "The scheme is for investors, who stay invested for five years or more. In the long term, there is a potential for high returns because of these equity funds."

"ELSS heavily rely on large caps," said Ashar. "The returns are similar to large caps over a medium or long term."

Ashar lists the factors to look out for while investing in ELSS:

• Select an ELSS fund with a divergent allocation.

• Invest in ELSS to prop up the large-cap segment.

• 70-80% ELSS funds are large-cap heavy.

• Balanced portfolio key to generate higher returns.

"Investors are spoiled for choice under the ELSS schemes," said Nain. He lists the following factors to consider before investing in ELSS funds:

• Analyst rating.

• Risk-adjusted returns.

• Asset under management.

• Age of the fund.

• Fund manager's tenure.

• Portfolio metric.

• Capture ratio.

• Maximum drawdown.

• Expense ratio.

According to Ashar, investors should select an ELSS fund in conjunction with their portfolio.

"A 30% allocation to large caps via ELSS is a good option," said Nain.

His top picks are: Zerodha ELSS Tax Saver Nifty Large Midcap 250 Index Fund and Navi ELSS Tax Saver Nifty 50 Index Fund.

Query 1: The multiple ELSS funds (all direct plan funds) I have invested in have matured, and I am looking for some liquidity. With the current bond yield, would it be the right call to redeem these safer instruments, or should I invest in MFs with more small-cap exposure? I have an urgent requirement for Rs 1.5 lakh cash.

Name: Swayam | Age 28 years

Aditya Nain: Now is a good time to book some of the profits, as the market is quite high. You can, maybe, invest in ultra short-duration fund, low-duration fund. For shorter time horizon—under two years—my comfort is towards the low duration funds.

Kalpesh Ashar: You need to cut down on the number of ELSSs. One or two ELSSs are good enough for a portfolio. It is a completely large-cap oriented portfolio. Hence, he needs diversification of portfolio. I would suggest a good flexi, multi or a mid-cap fund.