Are you looking for a tax-saving mutual fund? Do you want an investment that may offer inflation-beating returns? You may consider putting money in an equity-linked savings scheme or ELSS. It is an equity-diversified mutual fund that invests most of the corpus in stocks. Your ELSS investment qualifies for a tax deduction up to a maximum of Rs 1.5 lakh per annum under Section 80C of the IT Act, 1961. However, should you invest in one ELSS or multiple?
What is ELSS?
Equity-linked savings scheme or ELSS is a type of mutual fund scheme. It invests most of its corpus in equity and equity-related securities and has a three-year lock-in period.
You could consider investing in ELSS if you fall in the higher income tax brackets. You could save up to Rs 46,800 per year in taxes if you fall in the highest income tax slab and invest Rs 1.5 lakh per annum in an ELSS fund.
You may invest in ELSS to achieve your long-term financial goals, such as buying a house or retirement planning. It may offer you the dual benefits of tax saving and inflation-beating returns.
Should you invest in multiple ELSS funds?
You may consider investing in two or three ELSS funds. However, you may avoid investing in multiple ELSS funds as you could struggle to monitor your investment.
You may avoid investing in five or six ELSS funds as it may result in an overlap of your portfolio. You put money in the same set of stocks through multiple ELSS funds. It would result in a higher expense ratio without the benefits of diversification.
The underlying portfolio of an ELSS fund may consist of 80-100 stocks. However, ELSS funds may invest the bulk of the corpus in large-cap stocks. If you invest in multiple ELSS funds, your portfolio resembles a market index such as the BSE Sensex or the Nifty. You may lose the opportunity of investing in an equity fund which has the potential to beat the market index.
Your investment in ELSS qualifies for a tax deduction under Section 80C only up to a maximum of Rs 1.5 lakh per annum. You may invest in index funds instead of multiple ELSS funds if you want returns that match the market index. It is a passive investment that has a lower expense ratio as compared to ELSS funds.
Also Read: Avoid mistakes while claiming deduction under section 80C
You may invest in ELSS funds based on your investment objectives and risk profile. It puts money in stocks of companies across market capitalisation. For example, you could choose an ELSS fund that puts money in mid-cap stocks if you are an aggressive investor.
Should you invest in one ELSS fund?
You may consider investing in two or three ELSS funds to diversify your portfolio. Diversification spreads your investment across sectors and industries to protect your portfolio. You would find the risk in your portfolio rising if you invest in one ELSS fund. Your portfolio will underperform if the fund manager fails to beat the benchmark index.
You may struggle to cover a sizeable number of stocks across the market if you put money in a single ELSS fund. You can spread your investment across many profitable stocks if you invest in two or three ELSS funds. It increases your chances of earning a higher return over some time. However, you must look at the investment style of the fund manager before investing in ELSS funds.
You may invest in ELSS funds through a systematic investment plan or the SIP. It is a way of investing a fixed amount regularly in a mutual fund scheme of your choice. You may invest as low as Rs 500 per instalment in an ELSS fund through the SIP route.
You may invest in two or three ELSS funds to build an ideal portfolio. You could consider investing in ELSS funds with complementary strategies from different asset management companies. It reduces the risk of lower return if a fund manager fails to perform in a particular year. However, you must check your risk tolerance as ELSS funds invest in mid-cap and small-cap stocks. In a nutshell, you must select the right ELSS funds that combine tax saving and wealth creation.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
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