Tax saving is an important factor for any investor. There are equity funds that have schemes to save tax on investment. You may want to invest in such tax-saving funds, but with the numerous options out there, it can be challenging to choose the right fund for your investment. Continue reading to know the tips or checklist to help you decide which is the best fund for you.
A lot of young or new investors seem to have an interest in these tax saving funds because one does not need to have a huge amount of cash in hand to invest in such schemes. They invest about a year or two’s savings to save tax and earn some returns on it. However, hurried investments can prove to be more damaging than beneficial. Therefore, it is essential to keep a few points in mind before choosing which fund you want to invest in.
- Check Return Consistency: It is essential to check the return potential of a fund. Based on the past performance of a fund, you can gauge whether or not the fund can generate returns you expect, on the investment made. Do not get carried away and invest in the current top performing fund because it can slip to a lower rank anytime. What you need to check is the performance of the fund across multiple horizons.
- Check Fund’s Market Cap Allocation: This type of diversified equity fund invests in many securities across various industries. A fund invested in mid-cap to small-cap stocks may be riskier than the one invested in large-cap stocks. You have to check what kind of allocation the fund has given to market cap funds and match the fund’s risk profile with your risk tolerance.
- Decide on the Investment Period: Many people are attracted to this type of equity fund because of the short lock-in period, which is of 3 years only to avail tax benefits on gains. However, it is wise to pick a fund and stay invested in it for a longer duration because equity schemes can be risky and volatile in the short term. These equity funds have shown to give better returns on investments made for a period of 5-7 years or more.
- Calculate the Expense Ratio: Many investors are not aware of the fact that other than the fees they pay to distributors, there are other expenses too. A fund’s expense ratio includes the fund manager’s charges and other operational costs. It is sensible to choose a fund that has the lowest expense ratio because it shows you the amount that the fund house charges you for managing the fund. A fund that has a lower expense ratio means more available capital for investment and is bound to benefit you positively.
- Choose the Asset Management Company Wisely: An Asset Management Company (AMC) is largely responsible for taking key investment-related decisions, which has a direct impact on the fund’s performance. Make sure you choose a credible AMC after seeing its past performance.
Investing in such tax saving funds popularly known as ELSS funds is an attractive option for investors young and old alike. However, before choosing the right fund for you, bear in mind aspects like tax planning and long term financial goals. It is preferable to take the help of an expert to ease the process of picking the right fund meant for you.