Among other benefits, ELSS or Equity Linked Savings Scheme is popular due to the tax benefits it offers, as prescribed under Section 80 C of the Income Tax Act. These funds are indeed attractive, given that they may save you nearly Rs. 1.5 lakhs in taxes each year but to leverage their full potential, you need to steer clear of certain mistakes.
Avoid the following mistakes and you can enjoy the full range of benefits ELSS mutual fundbrings to your portfolio.
1. Redeeming investments immediately after the lock-in period ends
Since ELSS funds come with the shortest lock-in period among other tax-saving financial instruments, many investors hurry and pull out their investments as soon as the lock-in ends. This is a wrong move because the very nature of equity funds demands that you stay invested for the long-term. Moreover, if your ELSS mutual fund has been consistently delivering high returns, there’s all the more reason for you to stay invested beyond 3 years of lock-in.
2. Waiting till the last minute to invest in ELSS funds
A lot of investors rush to invest in an ELSS scheme at the end of the financial year when they need to submit investment proofs to the income tax department. This is a poor strategy as you’ll need to invest a lump-sum. Since ELSS are equity funds, the prevailing market conditions will greatly impact your returns. Instead, if you invest via Systematic Investment Plans (SIPs) throughout the year, you can avail of multiple benefits such as rupee cost averaging, power of compounding effect, and disciplined investing.
Additional Read: 5 Points to Note Before Investing in ELSS Tax Saving Funds
3. Choosing a Scheme Based on Current Performance
Since ELSS funds are suitable for long-term investment goals, you cannot judge a fund’s performance by its current 5-star rating. While there may be no harm in choosing such a fund, the best way to stay safe is to assess the fund’s track record, where its assets are invested, the process behind its consistently good performance, etc.
4. Neglecting fund category
One important thing to remember is that ELSS mutual funds are not just about reducing the tax burden. AMCs offer these funds based on their market capitalisation. Accordingly, the risk involved and returns will vary for each scheme. For instance – if you have a low risk profile, you should invest in large-cap ELSS funds that promise stable returns when compared to mid or small-cap funds. Make sure the ELSS funds in your portfolio are not at cross purpose with your overall financial goals.
Additional Read: Debunking 9 Popular Myths about ELSS funds
Over to You
Always monitor the ELSS fund’s performance over time and compare between schemes to see if the fund you’re choosing fits into your financial plan. Need help with this? Download Tata Capital’s Moneyfy app and make an informed choice. Browse through different ELSS funds, check their performance, and choose the one that aligns well with your investment objectives. To avail tax-saving benefits of mutual funds the right way, start investing in ELSS through Moneyfy at the beginning of the financial year itself!