When investing in an Equity-Linked Savings Scheme (ELSS) fund, many investors prioritise past performance as a key decision-making factor. While historical returns offer insights, they do not guarantee future performance and should not be the sole reason for selection.
ELSS funds are tax-saving mutual funds that primarily invest in equities and offer deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act. With a mandatory three-year lock-in period, they provide one of the shortest lock-in durations among tax-saving investments, along with the potential for long-term capital appreciation.
To make an informed decision, it’s essential to evaluate ELSS funds using a holistic approach that goes beyond just past returns.
Factors to assess beyond past returns
- Fund manager’s record
The experience and expertise of the fund manager play a crucial role in the performance of ELSS funds. A seasoned fund manager with a strong track record in equity investments is more likely to deliver consistent returns. When evaluating a fund manager, also consider the expense ratio, as higher costs can eat into your returns.
- Expense ratio
The expense ratio is the annual fee charged by the fund house for managing your investment. A lower expense ratio means you get to retain more of your returns. Compare expense ratios across different fund houses to avoid excessive fees. For example, one fund may have an expense ratio of 0.7%, while another may charge 1.1%.
- Portfolio composition
Analysing a fund’s portfolio composition helps determine its risk level and growth potential. Look for funds that:
- Are well-diversified across sectors and market capitalisations (large-cap, mid-cap, small-cap)
- Invest in high-quality companies with strong fundamentals and growth potential
- Avoid excessive exposure to any single sector, which can increase volatility
- Assets under management (AUM)
A fund’s AUM reflects investor confidence and fund stability. While a higher AUM often indicates a well-established fund, an excessively large AUM may reduce flexibility, especially for mid- and small-cap investments. Choose a fund with a balanced AUM that aligns with your risk tolerance and investment goals.
- Risk-adjusted returns
Rather than just looking at absolute returns, consider how efficiently the fund has performed relative to its risk. Key metrics to evaluate include:
- Sharpe ratio – Measures risk-adjusted returns. A higher ratio indicates better returns for the level of risk taken.
- Alpha – Shows the fund’s ability to generate returns above its benchmark index.
- Consistency across market cycles
Look for ELSS funds that have demonstrated consistent performance across different market phases (bull and bear markets). Funds that maintain stability and growth over time indicate a sound investment strategy rather than just benefiting from short-term market trends.
How to evaluate these factors
- Use ELSS calculators – These tools help estimate potential returns based on investment amount and time horizon.
- Review fund factsheets – Fund houses publish detailed reports covering portfolio composition, expense ratios, risk metrics, and historical performance.
- Consult financial advisors – Experts can offer personalised insights based on your financial goals and risk appetite.
Conclusion
While past returns provide useful insights, they should not be the sole factor when selecting an ELSS fund. A well-rounded approach considering fund manager expertise, expense ratio, portfolio allocation, risk-adjusted returns, and consistency across market cycles ensures a smarter and more sustainable investment decision.
Since ELSS funds are designed for long-term tax-saving and wealth creation, patience and strategic selection are key to maximising returns.
