Equity-Linked Savings Scheme (ELSS) is a popular tax-saving investment option under the Mutual Fund investment category. With its salient features of being eligible to deduct up to Rs. 1,50,000/- under the Income Tax Act U/S 80C from your taxable income to effectively reduce your tax liability, to having a minimum investment amount of as low as Rs. 500 per month, to having the shortest lock-in period of 3 years; ELSS investors have benefited greatly. However, not all investors are aware of the short-comings if investments are made incorrectly or haphazardly in ELSS. Read 5 Key mistakes investors should avoid while investing in ELSS;
Never late is better
A common observation is that the investors invest in ELSS only towards the end of the financial year when they have to submit their investment proofs to save tax. This is nothing but last-minute rush. An ill-strategy like this one can force many investors to invest a lump-sum amount in tax-saving instruments that may not be the best suited for them leading to cash crunch. Hence it’s wise to start your investment in ELSS at the beginning of the financial year thorough SIP. Thus you could enjoy various benefits of SIP such as disciplined investing, power of compounding, rupee cost average, besides tax benefits. After all, ‘early to rise makes one wealthy and wise’
New year does not mean new things
Another widely observed trend amongst ELSS investors is their habit of ploughing their assets in new ELSS funds every year. This has implications on your equity portfolio, because in just a couple of years, you end up accumulating too many stocks because of multiple funds that aren’t just hard to monitor but defeats the purpose having a focused yet optimally diversified portfolio. Ideally, you should stick to one ELSS fund year after year which has a focused and curated portfolio that has the potential to gain maximum returns in the long run and facilitates you to save tax. After all, ‘too much of anything is bad’
Don’t be commitment-phobic
The very fundamental feature of investing in equity is to stay invested for a span of 5-7 years to witness the desired results. But this is not the case with many equity investors who invest in ELSS funds and redeem the moment the lock-in completes 3 years. Although ELSS comes with the shortest lock-in period among the other tax-saving instruments; it certainly doesn’t mean that post completing 3 years one should pull out their investments. Also, if the scheme you have invested in has been consistently delivering well and outperforming the benchmark; then it’s not advisable to redeem even if the lock-in has ended. Instead you should fuel them with more investments. After all, ‘good things come to those who wait’
Take time to understand yourself
It is important to understand that different ELSS funds have their own characteristics and one should base their preferences first towards the market-cap orientation and then towards the returns that have been generated by the select or respective schemes. This by and large depends on the risk appetite of the investor. If you are an aggressive investor, you would ideally opt for a multi-cap mutual fund scheme and if you’re a moderate investor, would select a large cap mutual fund. But more so the choice to invest in any ELSS scheme solely depends on the investors risk appetite post assessing the nature of the scheme. After all, ‘do what suits you the best’
Consistent Performer Vs. Current Performer
As mentioned earlier, the underlying feature of equity investing is to hold on to your investments for a longer time horizon because that’s when the investments can multiply better. Having said this, a very common practice investors tend to make is to select a current ‘5 star’ rated performing fund over a consistently performing fund. This could be due to external influences, tips, suggestions etc. There is no harm in selecting a scheme that has generated good returns in the past but one must cautiously assess the track record, portfolio construct and the process behind the performance of the scheme. If a consistently performing scheme has given good returns or outperformed the benchmark across the various market cycles, then it is ideal to plough your money in that particular scheme to reap the most of its growth potential. After all, ‘consistent actions create consistent results’
**Investors are advised to consult their tax advisors in view of individual nature of tax benefits. Further, Tax deduction(s) available u/s 80C of the Income Tax Act, 1961 is subject to conditions specified therein, Investors are requested to note that fiscal laws may change from time to time and there can be no guarantee that the current tax position may continue in the future.
