5 Things to Know Before Investing in ELSS Funds

Equity Linked Saving Scheme (ELSS) are the great options for tax saving investments. ELSS Funds have statutory lock in period of 3 Years. So once the money is invested it cannot be redeemed until the lock in tenure is completed. It is always recommended to analyse and invest in better Elss funds.

Mentotax brings you 5 Things to Know before investing in ELSS Funds:

# AUM Size:

First and foremost thing that you have to look in a ELSS Fund is the Asset Under Management (AUM). AUM is the total assets that the fund is holding in the market. Higher AUM Size indicate the positive and stability of the fund.

# Expense Ratio:

Expense ratio is the fee charged by the Asset management company to manage the assets/investments of the investor. It is otherwise known as funds utilized for operative and administrative expenses of the scheme. Lower expense ratio indicate better the ELSS Funds. Be Specific while selecting ELSS Funds with lesser expense ratio.

# Standard Deviation:

Standard deviation measures the volatility of the returns in relation to the bench marked/Average return. SD Infers how much the fund can deviate from the historical returns of the scheme. If Standard deviation is higher, Volatility of the fund is also higher. Mentotax recommends to prefer the fund with lower Standard deviation.

Example: Standard deviation of the fund is 4% and Average return of the fund is 10%. It refers that fund may give return 6% to 14%

# Sharp Ratio:

Sharp ratio measures risk adjusted return. It helps investor return of investment compared to its risk. Sharp ratio is the average return earned in excess of the risk free rate. Sharp ratio can be used as powerful tool for fund selection and compare between two funds for additional return for the same risk. Greater the sharp ratio, More attractive the risk adjusted return of the fund.

Sharp ratio= (Average Fund Return – Risk free Rate)/Standard deviation of the fund.

# Treynor Ratio:

Treynor ratio is also used for measuring risk adjusted return. It infers returns in excess of what could have been earned on the riskless investment for each unit of risk taken. Treynor ratio indicates the reward to investors for taking the investment risk. Higher the treynor ratio, better is the risk adjusted return of the fund.

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