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Should we look at any other factors besides past performance while choosing an ELSS?

Dhirendra Kumar suggests ways to analyse past performance and advises taking the SIP route while investing in an ELSS

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Opting for the SIP route or investing a lump sum - which one is the better way to invest in an ELSS? Also, should we consider only past performance while selecting a fund?
- Gopinath

Answering the second question first, you should definitely look at past performance while analysing funds. However, what makes all the difference is the way you look at past performance. You should look at funds' long-term performance in the past both in the rising and falling markets. Taking an investment-related decision based only on the one-year return of a fund is not appropriate to evaluate its past performance.

This is because by looking at the rear view of the recent past, you are likely to believe that it will repeat in the future as well. However, in reality, when you are looking at such returns, it is unlikely to repeat. So, you'll get disappointed and get driven out of it forever.

Therefore, the best way to look at past performance is to understand the dynamics of the return. Focus on how erratic it has been and how it has been derived. For example, two funds have given a return of 20 per cent in the last five or seven years. In the case of the first fund, most of the returns came from its performance in the last two years. On the other hand, for the second fund, returns came very consistently. Also, in the second fund, the returns were largely built by protecting the decline in a falling market, while the first one fell dramatically and then made all the money in the last two years.

So, here the decision should be based on the character and derivation of the returns. Such factors are a reflection of the stock-selection ability of fund managers, which would help you figure out whether the performance was purely driven by chance or because of the fund's design.

If the trend in returns is by design, then it is likely to be a repeatable one. For the one which is by accident, then you will have to wait for the accident to happen again. So, this is the way to look at past performance.

Coming to your first question, you can invest in an ELSS without an SIP. However, I would still suggest investing through the SIP route only. The reason is that when we earn every month, why not invest every month?

The entire idea of doing an SIP is that when you make a lump-sum investment, you get scared and psychologically, odds are against you. In an ELSS fund, when you see a sharp decline, you cannot do anything because of the three-year lock-in. You can see the decline, get anxious or even curse but you can't do anything about it.

Another way to look at the lump-sum investing in an ELSS is that - if you're going to invest in it for the next 20 to 30 years, even if only in the month of March, then it effectively becomes an SIP only. It is your regular investment where you are making an annual investment for the next 30 years instead of every month.

But I would say as we earn our salary every month, spend it every month, pay our home loan EMI every month. Then why not SIP too? Therefore, an SIP is a better way of investment as it fits in your income cycle.