Best ELSS Funds to Invest
Your investment choices significantly impact the rate at which your money grows or compounds. There’s no shortfall of investment options and come tax filing season, the need to choose tax-saving investment schemes becomes urgent. Often, investment beginners take miscalculated or misguided decisions, which have negative repercussions on their long-term financial goals.
So, how do you, as an investor, decide what’s good for you? To begin with, ask yourself these three basic questions:
How much money can I keep aside each month for investment?
Which investment option will not only make my money grow, but also save tax?
How much risk can I afford to take if the market takes a downward spiral?
One investment option that comes close to answering all these questions is Equity Linked Mutual Funds.
No matter how much you wish to save – be it Rs 500 or Rs 5000 – you can invest in an ELSS via a systematic investment plan or through a lump-sum.
You can save up to Rs 45,000+ by investing in ELSS if you are in the highest tax bracket and earn equity-linked returns
You can mitigate the risk of market volatility by investing in ELSS through SIPs. Besides, equity tends to outperform other asset classes over the longer term
Not surprisingly, many new investors prefer to invest in the top ELSS mutual funds because they are tax-saving and an ideal gateway into the world of equity investments
Once you’ve decided that you’re going to invest in ELSS funds, you may think about asking an expert about the best ELSS funds. You may hear terms like risk, reward, past-performance and market capitalisation.
Risk and reward simply mean your return on investment. Some of the top ELSS mutual funds have been known to give higher returns than other tax-saving investment options (in the range of 10 percent-12 percent as compared to 6 percent-7 percent for other options in its class).
Next, it is important to review and understand how an equity-oriented fund has performed not just in the previous year, but over the last 5 years. Finally, you need to understand what market capitalisation is.
Market capitalisation or ‘market-cap’ determines a company’s size. It is calculated by multiplying the total outstanding shares of a company with the current market price of one share. Every company (across industries or sectors) is then grouped according to size, that is, small-cap, mid-cap and large-cap. Equity-oriented funds especially ELSS offer diversified portfolios based on investment goals. Each fund house has its own strategy, let us understand how these strategies create portfolio mixes which not only mitigate your risk but also give you higher returns.
When measuring fund returns, the term ‘benchmark’ is used widely. A benchmark is a broad market index like the BSE Sensex or the CNX Nifty, used to compare mutual fund returns and performance. We’ll also look at fund groups based on size and portfolio mix.
Large-cap ELSS Funds:
Large-cap companies are like the ‘big boys’ of industry, they’ve been here for years and each sector or industry has at least one major player. A large-cap company’s size is considered as ₹20,000 crore and higher. These companies have strong corporate-governance polices and their reputation precedes them. Analyses of past performance has proven that they’ve generated wealth for their investors slowly and steadily in the long run.
Large-cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalisation. In large-cap equity-oriented funds the underlying companies in the portfolio could be considered as relatively steady compounders of wealth and pay regular dividends. As far as risk-taking capacity goes, these are ideal for investors who have a low appetite for risk and are relatively patient with expectations of returns on investment. If you have long-term financial goals and prefer steady rewards like consistent increase in share value and continued dividend declarations, then large-cap ELSS funds are your best choice. Here are the best ELSS funds that are large-cap recommended by our expert fund managers:
Mid-cap ELSS Funds:
Mid-cap companies generally have a market capitalisation of between ₹ 5,000 and ₹20,000 crore. They’re established companies in their industry or sector, that are expected to experience rapid growth. Mid-cap companies draw investors because of their potential for growth and expansion. Stocks of these companies usually out-perform large-cap companies during phases of expansion and growth.
Mid-cap funds are mainly invested in mid-cap companies; however, underlying stocks are considered more volatile. A well-diversified portfolio, market timing and accurate analyses is necessary to mitigate investor risk. If you’re looking for higher returns and have a higher risk tolerance than what can be gained from investing in large-cap equity-oriented funds, you can opt for investing in mid-cap ELSS mutual funds. Have a look at the best mid-cap ELSS funds listed for you:
Small-cap ELSS Funds:
Companies that have a market capitalisation of less than ₹ 5,000 are generally classified as small-cap companies. These could be young (in age) and/or they could be serving niche markets and industries. They have fewer resources and are considered higher risk investments due to their age, the markets they operate in, and their size. Based on past reviews, small-cap companies also tend to be more sensitive to economic slowdown.
Like mid-cap funds, small-cap funds also tend to out-perform large-cap funds at specific phases of market movements. Stocks of small-cap companies typically have the highest growth potential, since the underlying companies are young, and are eager to expand aggressively. They are more vulnerable to a business or economic downturn, making them more volatile than large and mid-caps. If you have a high capacity for risk-bearing and are expecting higher returns in shorter time-frames, then you can choose to invest in small-cap ELSS funds. Here’s a list of best ELSS funds that are small-cap to invest in:
Multi-cap ELSS Funds:
As we know, mutual funds diversify their portfolio based on the strategy of each fund house. Some focus on large-cap companies, some on mid-cap companies and some on small companies. There are those which focus across company sizes, these are called multi-cap funds.
Many mutual fund investors, especially the new ones, are concerned and nervous about volatility in markets. Upward and downward market trends have a significant impact on mutual fund portfolios, which in turn affects an investor’s financial goals.
Multi-cap ELSS funds are diversified equity-oriented funds which invest in stocks of companies with different market capitalisations. The proportion of stocks are curated to meet the investment objective of the fund. Multi-cap funds are usually considered to compound wealth better than other categories of funds as they can take advantage of investment opportunities across the market.
However, this type of fund’s ability to manage volatility is always under review especially if it isn’t performing up to expectations. On the other hand, some funds perform so well, they exceed expectations. Research shows, multi-cap funds have performed well over the past 5-7 years. Investors looking for long-term wealth creation and are moderate risk-takers, may consider investing in multi-cap funds. Here’s a list of top ELSS funds that are multi-cap:
Large & Mid-cap ELSS Funds:
Mutual funds which diversify investments between large and mid-cap companies are classified as large and midcap funds. The proportion and stock distribution differ based on strategy and investment objective. Due to their exposure in both large and mid-cap size companies, these funds have a higher risk to return ratio compared to strictly large-cap funds.
At present, some large-cap ELSS schemes have a sizeable proportion of mid-cap stocks in their portfolio. Some Mid-cap ELSS funds also have a proportion of large-cap stocks.
Revised SEBI norms (2018) state, large-cap funds are required invest at least 80 percent of their corpus in the top 100 listed stocks by market capitalisation, leaving 20 percent of their corpus for mid-cap stocks. Mid-cap funds, on the other hand, are mandated to put at least 65 percent of total assets in companies ranked between 100-251st in market-cap terms, leaving 35 percent for large-cap stocks.
A higher proportion of mid-cap stock in a primarily large-cap mix, tends to make the portfolio riskier, however, according to SEBI, investors can choose funds easier based on individual risk-taking capacity, rather than picking a single group of stocks. Here’s a curated list of best large- & mid-cap ELSS funds:
Top ELSS Funds in India
Equity Linked Saving Schemes or ELSS, differ from other mutual funds, because of the exemption on income tax. If you have invested in this type of fund, you can avail an income tax benefit under Section 80C of the Income Tax Act of India—1961. Equity-oriented funds have the potential to offer superior returns than other asset classes over a long period and they’re a preferred investment option for first-time mutual fund investors.
Though these types of funds have a shorter lock-in period (only 3 years), you need to have at least some appetite for risk-taking. There are several risks associated with equity-oriented investments like stock volatility, upward and downward market spirals and a fluctuating economy. We at Angel BEE recommend, you should invest in ELSS funds to meet your financial goals, especially in the long-term.
Here’s a curated list of the Top ELSS funds based on factors like:
Downside Risk (Returns calculated when individual stocks or the market is in a downturn.)
Outperformance (When returns exceed market expectations.)
Factors to Consider Before Investing in ELSS
If you’re looking to invest in a top ELSS fund, simply looking at your return on investment is not enough, there are various other factors to look for. Here’s what you should consider before investing in this type of fund.
Evaluate a Funds Risk Profile: Equity-oriented funds have diverse strategies and stock mixes, there are large-cap, mid-cap, small-cap, multi-cap and large-cap options to choose from. When the fund is focused on individual market-cap size, you will find a stock mix of the same sized companies. In a multi-cap ELSS fund type, there is more flexibility and each fund house curates the stock mix based on its investment strategies and generalised investor risk profiles. Some funds have more large-cap stocks, some have more mid-cap stocks and some more small-cap stocks. There are also those who maintain a balanced portfolio, while a few adopt a more fluid approach, changing the portfolio mix according to market circumstances. Since each is unique and will yield varied returns, your next step is to evaluate your capacity to take risks in investment.
Evaluate Your Risk Profile: Investors are generally grouped into…
High Tolerance Risk (or aggressive risk-takers)
Many new investors tend to be cautious in their investment decisions and try to avoid as much risk as possible. Risk averse investors will review, analyse and scrutinise each investment option carefully. They like high returns on investment but prefer long-term investment and financial goals. Most risk averse investors prefer large-cap funds or funds hugely tilted toward large-cap stocks. In this way they not only minimise market risk, they ensure that their investment yields consistent and long-term high-returns.
Moderate risk-takers have some capacity for risk, they prefer mid-cap or largely mid-cap tilted funds. In this way, they do expect market volatility, but they prefer a portfolio which is consistent and gives long to medium-term returns.
High risk-takers are usually very aggressive in their investment tactics. They generally invest large sums in their funds and expect quicker and higher returns on investment. Aggressive investors usually prefer mid- to small-cap stock portfolios because the companies themselves are new, in niche markets or are continuously expanding. Stock market volatility reflects the highest in mid- to small-cap fund portfolios, however, the returns are higher than large-cap funds.
Evaluate Long-Term Financial Goals: It is recommended that before investing, you should define your financial goals. They will vary; however, an investment milestone is a major contributing factor in choosing a fund. Many investors are quick to redeem their ELSS portfolio once the 3-year lock-in period ends. However, evidence and analyses has proven, holding a fund portfolio for 5-7 years has successfully mitigated market associated risk and yielded consistently higher returns.