Choosing a tax-saving fund with VR tools

Equity-linked savings schemes (ELSS) or tax-saving funds are among the most investor-friendly 80C investment options for young investors looking to create long-term wealth on account of their simplicity, transparency, and relatively short lock-in periods. If you choose your ELSS funds carefully, you can initiate monthly SIPs in these funds to take care of your 80C limits for the long run, without having to scrounge for new funds or new investment options at the last minute each year. Here are a few steps to choosing an ELSS fund for your long-term portfolio. These variables may be viewed and analysed on the Value Research platform. 1. Market-cap bias While SEBI's new categorisation norms for mutual funds, effective from last year, have forced all diversified equity funds to classify themselves into very clearly defined market-cap and style buckets, the ELSS category continues to offer fund managers complete flexibility to manage their portfolios in the style of their choosing. This makes it important for investors choosing ELSS funds to first understand the fund's mandate in terms of its market-cap orientation and investment style. Today, ELSS funds in the market invest in widely varying proportions of large-, mid- and small-cap stocks, thus carrying differing degrees of risk. As of end-August 2019, the most conservative ELSS funds had 80-85 per cent of their portfolios invested in large-cap stocks, with the remaining allocation mainly to mid caps (Franklin Taxshield and HDFC Taxsaver). At the other end of the spectrum, there were ELSS funds with just a 35-50 per cent large-cap allocation, with the bulk of their portfolios invested in mid- and small-cap stocks (Aditya Birla SL Tax Relief, IDBI Equity Advantage). While funds with a bigger mid- and small-cap allocation may deliver bigger outperformance in bull phases, a large-cap bias protects downside better in bear markets. While choosing an ELSS, therefore, pay attention to its market-cap composition. If containin

This article was originally published on September 19, 2019.