Equity Linked Saving Schemes (ELSS) offer attractive tax benefits while providing exposure to the equity markets. However, like all equity investments, ELSS also carry risks from volatility and fluctuations. For investors with large financial goals such as accumulating a Rs 5 crore retirement corpus, effectively managing risks through proper diversification in their ELSS portfolio becomes critical. This article discusses the importance of diversification across market caps, investment styles and themes when constructing an ELSS portfolio aimed at building a substantial corpus over the long term.
ELSS tax savings
Equity Linked Saving Schemes (ELSS) offer attractive tax savings under Section 80C while delivering equity-linked returns. However, ELSS are also subject to significant market volatility. Investors targeting large corpus goals like Rs 5 crores must spread risks through proper diversification.
Allocating across market caps
ELSS invest predominantly in equities across market capitalizations. Investors should maintain reasonable exposure to large cap ELSS for stability and balance it with mid/small cap oriented ELSS for higher return potential. Avoid ELSS schemes concentrating only in small caps or micro caps as they carry higher volatility.
Blending investment styles
In addition to market cap allocations, investors should diversify across investment styles – growth, value and blended. Growth ELSS target rising stars while value ELSS look for undervalued stocks. Blended ELSS take a combined approach. Including different styles reduces concentration risk and volatility.
Consider sector and thematic ELSS
ELSS today include sectoral, thematic and index funds focused on specific sectors or themes. Banking, infrastructure, consumption, technology are some categories. Sparingly allocating to selective sector/thematic ELSS can enhance portfolio returns. But limit exposure to control risk.
Creating a diversified 5 crore ELSS portfolio
Here is one approach to construct a diversified ELSS portfolio targeting Rs 5 crores over 8-10 years:
Large cap ELSS – 50% allocation to provide stability and reduce volatility
Mid & small cap ELSS – 20% allocation to drive portfolio growth through higher returns
Value ELSS – 15% allocation to include potential turnaround stories
Growth ELSS – 10% allocation to participate in rising sectors and companies
Thematic ELSS – 5% allocation to segments like technology or consumption
Rebalancing yearly will account for performance variations across market caps, styles and themes.
Benefits of a diversified ELSS portfolio
This diversified portfolio balances risk and return through exposure across market cap segments, investment styles and themes. Core large cap funds reduce volatility while mid/small caps and thematic enhance returns.
ELSS investing over 8-10 years harnesses compounding to potentially grow the corpus to Rs 5 crores. Diversification manages risks associated with equity investing and ELSS lock-in rules.
Conclusion
Equity diversification is critical for ELSS investors targeting substantial corpus goals. Spreading investments across market caps, styles and themes can optimize portfolio returns while managing associated volatility. This focused approach can help achieve Rs 5 crore with managed risks. Ensure you get the best out of ELSS tax savings too.
