When it comes to wealth creation and tax-savings investment options, an equity-linked savings scheme (or ELSS) is one of the best instruments to save taxes and generate good returns. But many investors are not sure about how many ELSS funds should they have in their portfolio.
Different people may have different views but in general and for most investors, I think having about 1-2 ELSS funds is sufficient. Anything more would lead to over-diversification and result in overlap and duplication of portfolio with other existing funds in an individual‘s MF portfolio. I don’t think that investing in more than 2 ELSS funds would result in any incremental benefits.
At times, what happens is that investors end up investing in a different ELSS fund every year. They pick the best ELSS fund in the last 1 year and then pick that one to invest in for the next year. As result, they end up owning 5-6 funds over the course of a few years. But that is not advisable as I also wrote in detail at Don’t invest in new ELSS fund every year. It’s best to start investing in just one ELSS fund at the start and then review its performance every year. If the performance isn’t well when compared to benchmarks and other funds in the ELSS category, only then the investor should switch to a new ELSS fund.
What If you already have too many ELSS funds in your portfolio? If that’s the case, then its time to bring down the number of ELSS schemes then. Review all the funds in your portfolio and ELSS funds whose 3-year lock-in is complete and their performance over the last few years isn’t satisfactory, you can consider existing out of such ELSS funds. The idea is to eventually have just 1 or 2 ELSS funds in the portfolio.
And what if you want to invest more than Rs 1.5 lakh in ELSS funds?
First, if you invest more than Rs 1.5 lakh in ELSS schemes in a financial year, then you won’t get any additional tax benefit. So it doesn’t make sense. If you do have to invest, then instead go for non-ELSS diversified equity funds that come in different varieties like large-cap funds, index funds, Flexi-cap funds, mid-cap funds amongst many other mutual fund categories. Also, these funds do not have any lock-in period like the ELSS funds. You may want to read about this here in detail – Should I invest more than Rs 1.5 lakh in ELSS funds?
Talking of lock-ins, it’s true that these ELSS funds have a lock-in period of 3 years. But equity investing is best suited for long term investing. So even though you have the option of exiting after the lockin of 3 years, you should be willing to stay invested in these funds for a period of 5-7 years to reap the most benefits. And remember that if you invest via Systematic Investment Plan (SIP) in ELSS fund, then every SIP installment will have its own 3-year lock-in commencing from that specific SIP instalment’s date. So for the SIP done on, say, 14 March 2021, the lock-in period will be 3 years starting from 14 March 2024. The next instalment invested on 14 April 2021 will complete its lockin after 14 April 2024.
And how to invest in ELSS schemes? Should be one-time or via SIP?
I have written in detail about this that when deciding between lumpsum Vs SIP for ELSS investing, it’s best for most investors to do a SIP instead of a lump sum. Do read the linked article to know why in detail. Also, do read how to save Rs 1 crore using ELSS funds.
And different ELSS schemes have different portfolio biases. So some ELSS Funds will invest heavily in large caps while others may be more mid-and-small carp oriented. So given the fact that no two ELSS funds would have the same portfolio composition, you should pick ELSS funds that complement the existing funds’ approach in your investment portfolio. So if you already have large-cap funds in your portfolio, then picking an ELSS fund that has more mid-and-small cap funds would be a better portfolio fit.
If you are unsure about how much should I invest in ELSS funds, then first find out how much you need to invest more to exhaust the Section 80C limit of Rs 1.5 lakh. You would have already invested some money via contributions to Employee’s Provident Fund (EPF) and life insurance premiums which too are covered under Section 80C. So deduct those EPF and life insurance premium amount from Rs 1.5 lakh and find out how much extra you need to invest in ELSS in a financial year.
With that said I must say something here which most people forget. Saving tax is not sufficient. You need and should invest to achieve your financial goals and not just to save taxes. So any tax planning exercise should be part of your overall financial planning. That means you should choose your investments (both regular and tax-saving options) based on your financial goal, investment horizon, and risk profile. Never invest in any product randomly without giving it a thought as to how it fits into your overall portfolio.
ELSS schemes are excellent investment options if you don’t have much exposure to equity to start with and want to save some taxes too.
So that’s it.
I hope you are now clear about how many ELSS funds should you have in your mutual fund portfolio? To each his own but if you were to ask me, then the ideal number of ELSS funds in a portfolio would be 1-2. This helps prevent duplication and overlapping of portfolios of different ELSS schemes.