No sooner than the tax season approaches, you find financial planners and advisers alike, talking about the importance of ELSS funds to help you save taxes. Things like the best ELSS funds to invest, the best ELSS funds to decrease your tax liability, the top tax saving ELSS funds, etc. become commonplace.
But as an investor how would you know which suggestion to bank upon? They don’t always give preference to the same funds after all.
Although we agree that you might not consider yourself to be that educated in terms of the markets and prefer to rely on financial advisers and planners to be your lighthouse, you still need to know what are their evaluation parameters. What factors do they consider to pick those names? What are the criteria they use to sort the best suggestions? What is the framework behind their recommendations?
And it’s not just them.
What if, you feel confident enough to go about investing all by yourself, and just want some hand-holding regarding the selection criteria. What then? In this case, you need to have a clear idea of what all things you need to consider, to begin your investing journey.
Hence, in light of this, let’s have a look at all the components that can help you in deciding the best ELSS funds to invest in 2019.
Evaluating the risk-return potential of a fund is not just valid in case of ELSS funds. It’s true for any kind of investment you make, in any kind of fund. For every additional unit of risk that you take, your fund should generate commensurately higher returns.
In the case of ELSS funds, the risk to reward potential is high. That’s because ELSS funds invest in equities majorly, which are risky instruments, but that gets compensated with the high returns that they generate. Numbers like expense ratio (lowest), sharpe ratio (highest), etc. can be looked at, to determine which fund will have the better return potential.
Composition of the Fund
Known as top holdings as well, fund composition tells you about the various companies, the particular fund invests in, or is made up of. These companies belong to a range of different industries and market capitalisation, and it’s in the hands of the fund manager to ensure a well-diversified portfolio, so as to balance the risk quotient.
So how can you know which fund you should invest in, from its composition?
To give you an example, an ELSS fund having a majority of small or mid cap companies in its portfolio means a higher risk quotient than the one which is invested in more of large-cap companies. Similarly, let’s say, in today’s news, a big money scam has been unearthed from some bank. Now, this will result in the stock prices of the companies in the banking sector going down which further means that any fund that majorly invests in the banking sector, should not be a preferred option at this point of time.
Hence, it’s important to look at the composition of a fund before investing in it.
Making a beeline for the top performing funds is a concept very easy to fall for. And no matter how much the finance industry try to make people aware against it, they just keep falling prey to it. The reason being, as an investor, you just have to consider one extremely straightforward factor and bank your entire inclination on it. But the fact is it’s not only an insufficient parameter to rely upon but it’s also incorrect.
So how would you gauge a particular fund’s performance?
Fund performance actually encapsulates a few sub-factors and analysing all of them, simultaneously, can give you an idea of whether to invest in that particular fund.
To start with, look at the past performance of the fund over an extended period. And by extended period we mean not just 1 year or 2 year period. The ideal time period here should be 5 year returns and 10 year returns.
Next, how the fund performed during market slumps, could be another worthy factor to take into account. This can give you an idea of the strength of the fund and how capable and good the fund manager is, in taking bets during adverse situations.
A final metric in evaluating the fund performance could be how many times the fund has outperformed its benchmark and the category average. How this can be done is you need to split the fund’s 5-year returns into annualised returns for each of the past 5 years and then compare them against the benchmark and the category average.
Apart from these major metrics, there are some other minor metrics as well. Things such as the expertise of the fund manager, if the fund’s investment philosophy is in line with your financial goals if the time period of the fund performance aligns with your investment horizon, etc. can all be of varied help here.
If you yourself are doing your tax saving investments, then these will be the parameters you need to look at, before zeroing down on a particular fund. Alternatively, even if you’re taking the help of a financial adviser, you need to quiz him/her whether they have taken these factors into consideration before you opt to invest.
Following is the list of the Best ElSS Funds to Invest in 2019.