Kolkata, January 24: Equity-Linked Saving Scheme (ELSS) funds are a popular investment option because of the high returns it provides along with tax benefits. Investing in ELSS funds is a good idea, especially for those who are getting started with equities. However, there are some common mistakes investors tend to make when investing in ELSS. These mistakes mean that you do not make the most of your ELSS investments. Here are the top 5 ELSS investment mistakes to avoid.
Many tend to invest in ELSS funds in the last minute to save on taxes. A last minute lumpsum investment just for the sake of saving taxes is not a good idea. Also, it might put a strain on your cash flows. You should invest in ELSS through SIPs throughout the year. So if you plan to invest Rs 60,000 in a financial year, you should invest in SIPs for Rs 5,000 every month. Investing in SIPs give you the benefit of rupee cost averaging. It also means that you save in a disciplined manner throughout the year and there is no last minute rush. It is important to understand that ELSS is not just about tax saving but about the potential to generate wealth over a period of time.
Many investors invest in a new ELSS fund every year. In many cases they see which fund has given the highest return and invest in it. This does not make sense as a mutual fund is already a diversified product. Having too many ELSS funds makes them difficult to manage and monitor. Ideally you should keep your ELSS funds to a maximum of two.
ELSS has a lock-in period of 3 years which is the shortest among 80C investments. However, many investors tend to redeem the money as soon as the lock-in period is over. Mutual funds should be held for a period of five to seven years because in a shorter period the markets may be volatile. Even if the fund has been performing very well over three years, it should not be redeemed. Rather, one should continue investing in it. Investors in ELSS need to have a longer time commitment to make the most of their investments.
Sometimes investors choose ELSS funds based on short term returns or returns over six months or a year. But that should be avoided. Though past returns do not provide an indication of future performance, investors should look at returns over a 5 year period. The idea is to choose an ELSS fund that has been consistent over a longer period, rather than pick a fund that has outperformed its peers in the short term.
Another mistake to avoid is opting for the dividend option. The dividend that a fund offers gets deducted from the NAV. If you are investing in ELSS for the long term, do not go for the dividend option. Dividend makes sense only if you are looking for a periodic income. Your aim to create wealth, so you should always opt for the growth option.