3 Mins

It’s that time of the year again when we randomly invest in different 80C investments to save tax. But with increased awareness, investments in ELSS funds have increased. But there is a confusion that persists as to how many funds have to be included in the portfolio.

Diversify Right

Investing in many ELSS funds is not diversification. In fact, it is over-diversification. So investing in how many funds is ideal? Experts say one or max 2 funds for the purpose of tax saving is enough. Anything more leads to over-diversification. Investing in too many funds can make portfolio management difficult. Over diversifying can lead to lower returns. In over-diversification, you end up investing in similar sectors and stocks and own almost half the stock market.

Don’t go by the lock-in period

ELSS funds usually have a lock-in period of 3 years. But it is advised to stay invested in these funds for a period of at least 7 years. This is because these funds invest in equities and staying invested for an entire business cycle (7 years) can reap maximum benefits.

Do a SIP instead of a lump sum

Invest in ELSS funds by way of SIP instead of lump sum investment. This is beneficial in two ways. One, you can stick to one or max two funds every year. And two, you can reap the benefits of SIP investing like averaging out the cost of investment.

Do not choose different funds for different years

People invest in multiple funds choosing one fund a year and end up having 5-6 ELSS funds in their portfolio. Instead, they can pick a fund based on the advice of an expert and stick to it. Review the performance of the invested fund yearly and move to another fund if the existing fund isn’t performing well. In case an investor has more than 2 ELSS funds in the portfolio then redeeming the least performing funds is the only option they are left with. If they continue to stay invested in more than 2 funds then the portfolio will be over-diversified leading to lower portfolio returns.

Top ELSS funds to invest

Below is the list of top performing ELSS funds for you to invest.

Axis Long Term Equity

The fund’s investment strategy focuses on buying quality growth stocks. While selecting stocks, the fund looks for superior and scalable businesses, a high return on capital and secular growth. Consistent performance has led to its asset size burgeon from a mere Rs 4 crore at launch to over Rs 18,200 crore. The fund’s five year returns 6 percentage points more than the benchmark returns and 3 percentage points more than its category average. Its performance in 2011, showed an ability to contain losses in a falling market. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.01 lakhs now.

Aditya Birla Sun Life Tax Relief 96

One of the oldest ELSS funds, this fund has generated outperformance over the last 5 years. The fund follows a multi-cap, bottom-up strategy. It hunts for companies run by professional management, which have the predictability of earnings and strong moats. The five-year returns are now over 6 percentage points ahead of the benchmark returns and 3 percentage points more than the category returns.  The management team has remained very stable since 2006, with Ajay Garg at the helm. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.02 lakhs now.

Happy Investing!