8 Common Mistakes To Avoid While Investing in ELSS Mutual Funds
Equity-linked savings schemes (ELSS) are tax-saving financial instruments and offer tax benefits under section 80C of the Income Tax (IT) Act. Such funds invest a majority of the corpus in equities to deliver capital appreciation.
You may most likely invest in ELSS funds to save taxes. However, these schemes are also beneficial to achieve your long-term financial objectives through wealth creation. When you remain invested for a longer period, you are able to reap the benefits of compounding. With compounding, your gains are reinvested to accrue additional returns.
What are the mistakes to avoid while investing in ELSS Mutual Funds?
ELSS funds have several benefits. However, you must avoid these eight common mistakes to maximize your returns.
1. Timing the market
It is very difficult to time the market even for seasoned investors. Stock markets are exposed to a high uncertainty that makes it difficult to predict trends, which makes market timing almost impossible. Therefore, it is recommended you identify funds that are performing well and invest. It is important that you stay invested for a while to ride through market ups and downs. One option is to start a systematic investment plan (SIP). Under this plan, a specified amount is invested in your chosen funds at regular intervals. Therefore, when the market is up, lesser units are purchased and vice versa.
2. Investing at the last moment
Investment decisions must be well thought out. You must attach a financial goal to all your investments to succeed. Delaying to the last moment may give you insufficient time to develop an advantageous investment plan that helps you achieve your goal.
3. Not comprehending fund category
Asset management companies (AMCs) offer ELSS mutual funds based on large, medium, and small cap. Therefore, the risks and returns of each scheme vary. It is crucial you understand your risk appetite to ensure you make the right fund choice. Furthermore, considering only the returns on investment without understanding their risk appetite and funds’ investment philosophies is not advisable.
4. Making too many investments
ELSS mutual funds have a minimum lock-in period of three years. If you accumulate too many investments in ELSS plans, it becomes difficult to monitor your portfolio. Furthermore, you will be unable to exit these investments before the lock-in period.
5. Redeeming immediately after lock-in period
It is important you remain invested in equity products for at least five to seven years. You must avoid redeeming your ELSS investments immediately after the end of the lock-in period to maximize your returns. Rupee cost averaging and compounding in the long-term deliver higher returns and help you achieve long-term financial goals. It is possible you will also switch from one fund to another at the end of the lock-in period. However, if the fund continues to perform well, there is no reason to move out and invest in another ELSS plan. On the other hand, if the fund is not performing even when market conditions are favorable, switching to another scheme may be beneficial.
6. Opting for dividend option
To maximize the power of compounding, it is recommended you opt for the growth option. This ensures your returns are reinvested and grow to help accumulate a decent corpus. When you opt for the dividend option, the amount is paid to you and not reinvested. Therefore, you lose the opportunity of creating wealth over the longer period.
7. Focusing only on best performing funds
A common mistake is when you focus only on the best performing ELSS funds. However, one-time excellent performance does not guarantee the same in the future. Therefore, you must identify funds that showcase consistent performance. It is recommended you research the funds’ performances over the previous five years to make an informed decision. Calculating the Sharpe and expense ratios will also be beneficial in making the right decision instead on only focusing on the best performing ELSS funds at the moment.
8. Investing only to save tax
It is possible that you consider ELSS investments only as a tool to reduce your tax liability. However, you need to completely analyze the different options to understand risk, lock-in period, and returns. Like all other types of investments, making an informed and well thought out decision is crucial.
When contemplating ELSS investments, consider the following points to identify the best plans.
- Consistent performance
- If you are moderate risk investor, consider investing in large-cap funds as these are less volatile
- When you invest is important; therefore, it is advisable to commence from the first month of the financial year
Financial planning delivers better returns when the investments are spread to generate stable returns. Gaining complete understanding and knowledge before making investment decisions is important.
Invest in ELSS today and enjoy tax savings as well as long-term capital appreciation.
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