How to pick ELSS Mutual Funds to save your Tax.

ELSS funds, meaning Equity Linked Savings Schemes are Mutual fund investment schemes that help you save income tax under Section 80C of the Income Tax Act, 1961. That's why they are also known as tax-saving funds.

You can claim tax deductions of up to Rs 1.5 lakh a year by investing in ELSS. ELSS mutual funds have the potential to offer the highest returns among all Section 80C investments.

Equity Linked Savings Scheme benefits -

• Up to 1.5 L tax deduction under section 80c
• Predominantly invests in the stock market (equity)
• Mandatory lock-in period of 3 years to avail tax benefit
• ELSS funds are the only tax-saving investment with the potential to offer inflation-beating returns
• Gives dual advantage of Tax saving and wealth creation

How to select a fund to invest in?

1. Performance
2. Risk
3. Cost

The Framework for selection

1. Rolling returns 3 years (rank from highest to lowest)

Rolling returns of a mutual fund scheme are annualized returns of the scheme on different dates for specified investment tenure. Rolling returns are calculated for rolling periods beginning with a certain date and investment tenure, and then returns for all consecutive dates (same tenure) are also calculated.

2. Sharpe ratio > Category Sharpe ratios

Sharpe ratio is a measure of the risk-adjusted return of a financial portfolio. A higher Sharpe ratio portfolio is considered superior to its peers.

3. Alpha > 1%

Alpha is considered the active return on investment, gauging the performance of an investment against a market index or benchmark that represents the market's movement as a whole.

4. Beta Benchmark

Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.

5. Capture ratio downside < Benchmark

The capture ratio measures the performance of an investment (like mutual funds) during upward and downward market trends with respect to its benchmark index. The ratio is essentially a statistical representation of how a fund manager has managed the fund during different market conditions for addressing risk.

6. TER(Total Expense ratio) <1.5%

All such costs for running and managing a mutual fund scheme are collectively referred to as 'Total Expense Ratio' (TER) The TER is calculated as a percentage of the Scheme's average Net Asset Value (NAV).