Equity-Linked Savings Scheme, commonly known as ELSS, is a popular tax-saving investment option among investors, and for all the right reasons. Investors usually invest in ELSS funds to avail the tax benefits of up to Rs 1.5 lac under section 80C of the IT act, 1961. An investor can save up to Rs 46,800 by investing in ELSS tax saving mutual funds. Thus, ELSS mutual funds offer the dual benefits of capital appreciation and tax saving. However, before you decide to invest in ELSS funds, here are top 5 mistakes that you must avoid while investing in ELSS:
- Loving large:The asset size of a mutual fund scheme can be huge for many reasons. If it is among the top performing funds, more and more investors would want to invest in it, making it further bigger. And also as the NAV (net asset value) of the fund rises, its size also increases. Moreover, big-sized funds provide comfort to the fund managers in managing the fund without fretting about redemption by any big-ticket investor.
- Being trigger-happy:Many mutual fund schemes underperform for a year or so but usually make a strong comeback in three to five years. Investors are advised not to panic and sell at the primary instance of underperformance. Why, you may wonder? Many times, when the stock market take a hit and its stocks rally, it usually payx off more than enough for its brief underperformance. Thus, an investor is advised by experts to stay invested for the long-term.
- Lump sum investing:Investing in ELSS funds via lumpsum in the last few months of the financial year might not be the most optimum way. Rupee cost averaging offered by SIP investments ensure that the unit cost of mutual fund units is averaged out through the ups and downs in the equity market. For instance, if you plan to invest Rs1.5 lac in ELSS in a particular financial year, you may consider to SIP it every month for Rs 12,500.
- Ignoring investing style:Several investors ignore this trait. Unlike other equity funds, ELSS funds do not declare its market cap orientation. So, in the market, several schemes invest considerably into midcaps. In contrast, others stick to small caps or large caps or a combination of both. It’s crucial to understand how the returns are produced, and that’s where a scan of their investment portfolio will help. Make sure not to compare apples to oranges.
- Redeeming immediately after the lock-in period
Investors are advised to stay invested in equity products investment options for a minimum of 5-7 years. They must refrain from redeeming their ELSS investments as soon as the lock-in period ends to earn maximum returns. Rupee cost averaging, and the power of compounding works to provide significant returns in the long-term. As an investor, you have the option to switch from one fund to another after the maturity of the ELSS scheme. However, if the fund is performing well, there is no need to move out and invest in a different scheme.