How to evaluate the performance of an ELSS mutual fund?

An equity-linked savings scheme or ELSS provides a great opportunity to diversify your mutual fund portfolio and save taxes at the same time. Being one of the tax saving investments under 80C of the Income Tax Act, 1961, these funds also offer great potential for wealth creation and should form a part of any investor’s portfolio. However, the key is to choose the right ELSS mutual fund for your portfolio by evaluating its performance.

With that being said, here are some parameters you should consider when evaluating an ELSS fund so that your investments work for your portfolio and goals.

  • Return analysis

Equity investments carry market risk. The NAV (net asset value) or price of a unit may fluctuate depending upon inflation, prevailing interest rates, political developments impacting the market sentiments, etc. So, before you invest in ELSS online, make a return analysis to understand both short-term and long-term gains associated with investments made in various equity-linked saving schemes (ELSS). This includes annualised returns across different durations such as 1-year, 3-year, 5-year, etc.

You can also use the information to compare returns earned from other investments such as fixed deposits, PPF, debt instruments, etc.

  • Analyse key ratios

Before you invest in ELSS mutual funds, look at key ratios such as Sharpe ratio and standard deviation. The Sharpe ratio measures how much risk is associated with a particular investment, while standard deviation measures the amount of volatility within a given investment over time. These two metrics can help you understand how well an ELSS fund is performing relative to similar funds.

  • Compare the scheme’s performance with its benchmark and category peers

While looking at the scheme’s performance alone can provide some insight, you can obtain a more precise evaluation by comparing the fund’s performance with both its category and benchmark.

If it performs better than its benchmark, it has been managed well. But if the ELSS fund is underperforming both its benchmark and category, you should take notice. While a short-term underperformance may be attributable to various factors, if it happens over a year or more, you need to take it seriously and figure out what has caused the poor performance. You can do it by watching the interviews of fund managers or researching the fund online.

  • Check portfolio composition and asset allocation

To get a more accurate picture of whether a particular ELSS fund fits your risk profile and mutual fund investment objectives, it’s essential to look at its portfolio composition and asset allocation strategy carefully. By understanding which stocks make up the majority of assets under management in your chosen funds and their respective weightage in terms of percentage shareholding, you can gain deeper insight into how well a stock will perform over time against other similar schemes in market conditions.

Closing thoughts

Equity-linked savings schemes (ELSS) can be a great way to invest in mutual funds with additional tax savings – provided they are carefully researched and properly evaluated. Once you have assessed the performance, you can easily buy ELSS online through various digital platforms.

Also, to understand how different ELSS funds would fit your budget, risk profile, and return expectations, it would be more prudent to consult a certified financial advisor and formulate a strategy accordingly.

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