There are several goals that people have when making investments. Right from securing the financial future to reducing tax liabilities, you can get it all done by investing correctly. For starters, it is necessary to pick an investment tool that will help you accomplish your investment goals with ease.
Today, the market is flooded with various investment instruments, such as the Unit Linked Insurance Plan (ULIP), National Savings Certificate (NSC), Provident Fund (PF), etc. Despite the different options, Equity Linked Savings Scheme (ELSS) remain all-time popular. If you are looking forward to investing in ELSS, see to it that you do so diligently with enough research on the investment tool.
Let’s look at these right ways to choose the ELSS funds for yourself:
- Choose Funds That Offer Risk-Adjusted Returns
Many investors make the mistake of looking at the past returns earned on the investment tool at the time of deciding on a product. As an investor, you should avoid checking the past performances since it might not paint an accurate picture of the investment instrument. It is wise to go with a fund that provides better returns and helps you adjust the market-linked risks.
While choosing funds with better risk-adjusted returns, you should always check how the funds have performed over time. It is wise to analyse the performance of the said fund based on different parameters that have an impact on the returns generated.
One of the essential parameters is the Information Ratio. It indicates the consistency of the fund manager in creating the risk-adjusted performance of your portfolio. If the Information Ratio is high, it means that the fund manager has delivered consistent ratios over time. Overall, it is the real test of every fund manager’s skills and reliability.
- Check The Consistency Of The Returns
The second crucial factor to consider is the consistency of the returns earned on your chosen funds. It helps you measure the overall investment results. Moreover, it will let you (the investor) get above-average returns when the funds are managed actively. Therefore, it is wise to find out the number of times a scheme has outperformed its benchmark as well as the category on an average.
There are multiple ways to calculate consistency. To do so, take a fund’s return earned on the said day along with its daily benchmark value for a long horizon of five years. For instance, record the returns earned and benchmark value of the given funds as on 1st April 2011, for the fund and the 2nd April 2011, 3rd April 2011, 4th April 2011, and so on, up to 1st July 2016. After this, measures the number of returns have been above the benchmark.
This way, you will understand how many times it has outperformed. In simple terms, the higher the outperformance, the better the consistency of the fund to earn high returns for you in the future. Once your calculation is over, compare the consistency of the fund with others to make the final decision.
To conclude, ELSS mutual funds are multi-cap equity investments. Therefore, choose ELSS funds that will offer you the best returns over time. Keeping all the above parameters in mind, examine the consistency of its performance in different phases of the market fluctuations. Happy investing!