They say the market is a game of survival, and if you don’t learn to survive, the market will get the better of you one day or the other. Thus, your main arsenal to ensure your stay in the market is risk management. And for long-term investors, one of the famous methods to do so is portfolio diversification.
Well, if you are looking to minimise your risk and diversify your portfolio through mutual funds, a well-known solution for this is Equity-Linked Savings Scheme (ELSS). ELSS funds are one of the best-diversified tax saving schemes that can provide a high enough return to beat inflation in the long term.
What is ELSS?
As the name suggests, ELSS funds have much of the fund’s allocation (65% of the portfolio) towards equity and equity-linked securities. However, some exposure to fixed-income securities could also be present. The lock-in period for ELSS is three years, and your investment is also eligible for tax deduction up to a maximum of Rs. 1.5 lakh each year under section 80C of the Income Tax Act, 1961. In fact, ELSS funds are the only type of mutual funds that offer tax benefits.
Is it beneficial to invest in multiple ELSS?
Though ELSS can indeed add an excellent layer of diversification to your portfolio that minimises your risk to a great extent, the question stands: Is it worth it? Because the ultimate goal for which people make investments is to gain a good return.
A typical ELSS fund would have around 50-60 equity stocks and having two ELSS funds would be enough to fill the diversification needs of a portfolio. If you have more than three or four ELSS funds, there would be overlapping of the same stocks in your portfolio, resulting in a higher expense ratio. A diversified portfolio will surely help you minimise your risk in unfavourable market scenarios; however, it also limits your growth potential when the market is in better condition.
Comparison of ELSS with other tax-saving funds
|Investment type||Post-tax returns||Risk||Lock-in period||Taxable return|
|ELSS||13-15%||Moderate||3 years||Partially Taxable|
|NPS||8-13%||Moderate||Till Retirement||Partially Taxable|
|FD/ NSC||5-6%||Low||5 years||Yes|
If you want more details about the best ELSS funds 2021 and want to explore other investment options to increase your return, you can consult a financial advisor.
ELSS funds seem to be a superior option to other tax-saving schemes due to the lowest lock-in period and greater returns. It is an excellent option, especially if you come under the highest tax bracket. However, as said above, having multiple ELSS funds is not all too rewarding, and therefore investing in other high return instruments can very well serve the need of a strong gainer in your portfolio.