ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.
ELSS Funds are considered the go to Funds for tax saving, good returns especially for people under the age of 30! The lock on in ensures the money is invested for a long time.
Their are Numerous types and categories of mutual funds to choose from, just within ELSS funds, you have to choose from hundreds of different Funds..so how does one choose which one's best for them?
Well, here's some common things to look for when choosing a fund ( mutual fund or index funds too)
The Expense Ratio is the commission or the fee charged from the investors for the proper management of their investments. It is basically the fund manager’s fee that is levied upon all investors for ensuring profits across the investments. As an investor, you must target mutual funds that have a lower expense ratio as the percentage may seem quite small but when it will be calculated across your total investment portfolio, it will have a deep impact.
Regualr mutual funds have a high cost, the few percentages may seem low, but in the long run, it hinders the compounding of the investments..for most people , Direct Funds are the better option!
A general rule of thumb is , the higher the AUM (Assets under managemnt) which is the actual cash invested in them.
Low minimum amount – Most ELSS schemes allow investors to start investing with as low as Rs.500. This ensures that you start investing without having to accumulate a reasonable investible corpus.
SIPs – While you can invest a lump sum amount in an ELSS scheme, most investors prefer the SIP method as it allows them to invest in small amounts and avail tax benefits along with an opportunity to create wealth.
No limitation – You can invest as much as you want (tax benefits under section 80c) and can keep the money invested even after the 3 year lock in.
Riskometer :
Every fund has a riskometer which shows how risky it is to invest in it. Usally Equity based funds are riskier like ELSS Funds but give better returns in the long run.
Entry & Exit load refers to the fee charged by fund houses from investors to start investing in their mutual fund scheme or Exiting the scheme.
As an investor, you must look out for mutual fund schemes that have zero or minimal entry and exit load.
<aside> 💡 While their are even more factors such as your investment Goals, Taxes , Fund Manager history , Crisil rating, portfolio quality and returns over a period of time, these were some majour ones!
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Many young investors prefer ELSS funds to PPF or NSC due to its short lock-in period of 3 years. This can be a counterproductive strategy since equity investments are known to take around 5-7 years to stabilize. Being inherently volatile, keeping a short-term investment horizon with ELSS funds should be avoided.
Now that we know the basics of what ELSS Funds are and we also understand that it is really good option for people in their 20's and we know the basics of screening a mutual Fund based on different Factors. It's time to Choose a few:
While a lot of different people will have a different choice 🤔, based on their personal goals , Risk tolerance and return expectations, here are 2 Funds that we think will be a Great choice based on several factors: