It is that time of the year when investors start tax planning and Equity Linked Savings Scheme (ELSS) offers dual benefits of capital appreciation and earning some more through savings from tax exemption.

ELSS mutual funds offer exemption on investments up to Rs 150,000 under Section 80C of the Income Tax Act.

Investing in ELSS MF schemes over a long term is more remunerative in comparison to various options available under section 80C, Deepak Gagrani, Founder of Madhuban Finvest said as he picks this instrument as one of his top choices for both tax savings and long-term wealth creation.

Investors looking for twin engines of quality and growth.

Indian equity benchmark delivered an impressive 23% return in 2023, outperforming all other asset classes. In the calendar year, markets produced 240 multibaggers largely driven by the rally in midcap and smallcap stocks. These stocks have market capitalisation of Rs 1,000 crore or more. However, markets have displayed volatility over the first one and a half months in 2024.

Success in ELSS investment is primarily a function of time rather than timing, Gagrani said, advising investors to opt for a systematic investment plan (SIPs) in ELSS to mitigate the impact of market timing on long-term returns.

Echoing similar views and pitching for ELSS, Mukesh Kochar, National Head of Wealth at AUM Capital said that timing the market is very difficult and a recipe for disaster as short-term returns may not reflect the true potential of the scheme if markets are volatile. One needs to start SIP/STP and do it every year for a longer period apart from initiating a lump sum investment now as only one and half months remain for this FY, Kochar said.

Adhil Shetty, Chief Executive Officer at Bankbazaar.com recommends assessment of an individual’s risk tolerance and investment horizon before taking a plunge. ELSS funds typically have a lock-in period of three years, so investors should align their investment horizon accordingly, Shetty said.

According to January data published by the Association of Mutual Funds in India (AMFI), ELSS MFs witnessed inflows of Rs 533 crore while the total assets under management (AUM) at Rs 2,250,336 crore as on January 31, 2024.

Kochar of AUM Capital vouched for the growing popularity of ELSS schemes saying that this category will attract more money and new folios, consistently going ahead

Among the limitations, the category offers investors exemption only up to Rs 150,000 which may not trigger swift traction for this category, in Kochar’s view.

Dos and don’ts

The investors should look at risk-adjusted returns and the risks any fund is taking to generate the return, experts said while agreeing on the performance consistency and fund’s performance against its peers and benchmarks.

The investors should also analyse the fund’s standard deviation, sharpe ratio and beta, Kochar said. A fund with a standard deviation of 18 with returns of 19% is better than the one with a 26 standard deviation and 20% returns, he explained.

For Shetty of Bankbazaar, the fund’s investment objective, portfolio composition, and performance track record are among the top selling points.

Experts’ picks

Gagrani recommended three funds given their largecap bias viz.

– Parag Parikh Tax Saver Fund

– HDFC ELSS Tax Saver Fund

– Quant ELSS Tax Saver Fund

Kochar’s picks funds suitable for conservative and aggressive investors

– SBI Long Term Equity fund for conservative investors

– Quant ELSS fund for aggressive investors

– DSP ELSS Tax Saver fund for conservative investors

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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