One of the most popular tax-saving investing options, among others like the Public Provident Fund (PPF) and the National Pension Scheme, is Equity-Link Savings Scheme (ELSS). It’s because, out of the three savings plans described above, ELSS mutual funds offer the best returns.

The lowest lock-in period across all tax-saving investment options offers many benefits, including tax savings under Section 80C of the Income Tax Act of 1961 and wealth growth through better returns over time. These mutual funds are diversified and offer annual tax deductions of up to Rs 1.5 lakh. ELSS funds allocate 80% of their capital to equity investments and 20% to debt securities.

What are ELSS Funds?

An equity-linked savings scheme or ELSS is a particular kind of mutual fund scheme. It has a three-year lock-in term and invests most of its corpus in equity and equity-related securities.

If you are in a higher income tax bracket, you might consider investing in ELSS. If you invest Rs 1.5 lakh annually in an ELSS fund and are in the highest income tax bracket, you might save up to Rs 46,800 in taxes yearly.

To reach your long-term financial objectives, such as home ownership or retirement planning, you may invest in ELSS. You could receive returns that outpace inflation while also saving on taxes.

But as people became more aware, ELSS fund investments rose. The number of funds that must be included in the portfolio is still unclear.

Diversify

Diversification does not include purchasing numerous ELSS funds. In actuality, it is excessively diverse. What is the appropriate number of funds to invest in? According to experts, one or two funds are sufficient for tax-saving purposes—any more results in excessive diversification. Too many investments might make it challenging to manage a portfolio. Lower returns may result from over-diversification. Over-diversification occurs when you hold over half of the stock market and invest in comparable industries and companies.

Investment Horizon

Experts advise investors to hold off on redeeming their ELSS units after the lock-in period has ended to maximise returns. The units’ net asset value (NAV) varies with market booms and busts. Therefore an investment period of 5-7 years is ideal for spreading risk and profits over a longer time frame as they typically outperform all other asset classes over the long run.

Long-term investing will allow you to see the complete market cycle, from the bottom to the top, which will enable you to earn lucrative returns. This is especially crucial when ELSS units are purchased while markets are almost at all-time highs, as they are at the moment.

Choose between Tax Savings and Future planning

You won’t have to decide whether to invest money for long-term goals or lower your tax burden any longer.

Although traditional tax-saving strategies like PPF and NSC let you reduce your tax burden, their returns hardly keep up with inflation. On the other hand, due to the potential of equities, ELSS funds, over the long run, efficiently provide returns that outperform inflation.

This enables you to link your ELSS fund investments to long-term objectives like retirement or raising children.

Should you invest in multiple ELSS Funds?

You might think about funding two or three ELSS funds. However, you might avoid investing in many ELSS funds as you can find it challenging to keep track of your money.

Avoid investing in more than five or six ELSS funds, as your portfolio may overlap. You invest in the same stocks using various ELSS funds. Without the advantages of diversification, the expense ratio would be larger.

An ELSS fund’s underlying portfolio can include 80 to 100 stocks. However, most of the capital might be used by ELSS funds in large-cap companies. If you invest in several ELSS funds, your portfolio will resemble a market index, such as the BSE Sensex or the Nifty 50.

Bottom Line

You could get into two or three ELSS funds for the best portfolio. You might consider investing in ELSS funds from several asset management firms that use complementary techniques. It lessens the possibility of a lesser return if a fund manager underperforms in a given year. However, it would help if you considered your risk tolerance because ELSS funds invest in small-cap and mid-cap equities. Choose the correct ELSS funds that combine tax mitigation and wealth building.