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How to diversify your portfolio with ELSS mutual funds

When it comes to achieving your financial goals, there are many different strategies that you can rely on. From setting up an emergency fund and investing in traditional securities like stocks and bonds to taking calculated risks with commodities or currencies – the options for portfolio diversification are plenty. But even among all these opportunities, one option that offers capital appreciation with exclusive tax benefits is equity linked savings scheme or ELSS mutual funds.

But for building a successful ELSS investment portfolio that can weather any market volatility and fluctuations, diversification is key. With that being said, let’s dive into how you can add these tax saving mutual funds into your investment strategies and create a more diverse portfolio.

  • Invest in ELSS online via an SIP

An SIP or a Systematic Investment Plan is a great way to regularly invest in ELSS mutual funds over time and take advantage of market fluctuations. By investing small amounts every month or the frequency you choose, you can accumulate a larger amount over the long term without putting too much strain on your existing budget. 

Additionally, SIPs allow investors to benefit from rupee cost averaging, the process of buying more units when prices are low and fewer units when prices are high, which can further help reduce risk and maximise returns over time.

  • Differentiate between ELSS funds focusing specifically on large/small/mid cap

When investing in different ELSS funds, it’s crucial to consider whether they focus specifically on large-, mid-, or small-cap stocks or all three types as this will affect how diverse your overall portfolio is.

Large-cap stocks tend to be less risky but also provide lower potential rewards than smaller companies. Mid-caps generally offer more potential rewards than large caps but also carry higher risks. While small caps may provide high returns, they also come with greater volatility and riskier investments. As such, you can consider investing in different ELSS funds focusing primarily on large-, mid-, and small-cap separately to enhance diversification and ensure no one type has too much weight in the portfolio.

  • Consider both the asset allocation and sector weightings within each fund

While trying to diversify with ELSS mutual funds, consider both the asset allocation and sector weightings within each fund. Asset allocation refers to the proportion of assets held in investments such as stocks or bonds. Different asset allocations can have different risks and rewards associated with them depending on the market conditions at any given time. Similarly, sector weightings refer to the proportions of assets held in different industries or sectors such as technology, healthcare, finance, etc.

It is advisable to choose an appropriate mix of asset allocation and sector weightings to diversify your mutual fund portfolio and ensure you are not overexposing yourself to any single industry or sector.

Final words

Investing in ELSS mutual funds certainly adds value to your portfolio and can be a great asset for long-term financial security. At the same time, it is important to diversify your investments and portfolio. With the stock market being unpredictable and volatile, having right planning and diversification strategies is essential to enhance your ELSS returns and secure your financial future. However, keep in mind that any investment should be made after considering various factors – market condition, investment horizon, financial goals, and risk appetite being the most important ones.

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