The humble offering of the mutual fund’s arena, ‘equity linked savings scheme’, is looked upon as a tax saving instruments by many. Albert Einstein rightly quoted- “The hardest thing in the world to understand is the income tax.” And investors have resorted to ELSS to work its magic on tax saving. While investors are more interested in knowing how to invest in ELSS, they ignore the most common facts while investing in them. Many mistakes are made while investing in equity linked savings scheme.
Here is the list of mistakes that investors should avoid while investing in ELSS:
Mistake 1: Beginning late
While concerned about tax saving, investors look at ELSS as only the tax saving instruments. This is the biggest mistake that they make as they start the investment at the end of the financial year. When tax saving proof must be produced, investors rush towards ELSS at the end of the year. But it is important to know that you are not doing good to your finances by starting late. Instead, you can maximize your returns by starting the investment early by regularly investing in the systematic investment plans (SIP) or systematic transfer plans STP). Another problem with making a late investment in ELSS is that you don’t know how the market is at that time. So, if the market is up you will end up paying a high value for the units that you purchase as you have no choice but to invest anyhow.
Mistake 2: Only looking for best performers
Investors make a mistake when they try to invest in only the best performing scheme at that point of time. But you cannot tell if the scheme will do well in the future based upon its one-time best performance. Rather than best performing ELSS, investors should consider the consistent performing ELSS. Checking the performance of the fund with its benchmark for the last five years can help you make the right decision. Know the vital ratios associated with the fund like the expense ratio and sharpe ratio.
Mistake 3: Only looking for returns
Yes, we always look for the return on investment (ROI). There is nothing wrong with it. It’s the basic human nature. If somebody asks you ‘how to invest in ELSS? Your first insight will be to look at the returns the fund will generate for you. Yes, returns are necessary but analyzing the type of ELSS that you invest in should be more important. If you have an average risk appetite and you invest in aggressively risky ELSS just for the sake of higher returns, then you are in a pickle. Investors forget to understand their investment philosophy and simply invest for higher returns. If you are a conservative investor, then conservative ELSS funds are for you and not the aggressive funds.
Mistake 4: Falling in the dividend trap
You should invest in ELSS schemes to create wealth. That should be your top priority. But many investors fall prey to the dividend option when they invest in ELSS. Remember that you are paid the dividend from your own money. Dividend option should not be on your mind unless you essentially need periodic income.
Mistake 5: Investing only for tax saving
Investors view ELSS only as the tax saving instruments. While doing so, they forget to analyze the factors like risk profile, returns and the lock-in period. So, if you are investing, take a thorough look at the risk factors, and then invest.
Mistake 6: Redeeming after the lock-in period
ELSS has the lock-in period of three years, and investors make the mistake of redeeming the fund immediately after the lock-in period is over. If your fund is doing good and is showing positive performance, do not redeem it. If your ELSS fund is investing in equity as an asset class, it is recommended that you stay invested for at least five to seven years to reap good returns.
Mistake 7: Switching funds every three years
When the lock-in period of three years is over, investors immediately search for other ELSS funds and jump to invest in them. If your fund is underperforming even when the market is booming then your decision to move out of the fund is the right one. But if your fund is underperforming, there can be several reasons for it. Understand those reasons first and then take the decision.
Mistake 8: Accumulating too many ELSS’s
Too many cooks spoil the broth. Similarly investing in too many ELSS’s will make it difficult for you to manage them. If you have a long investment horizon then understanding and managing the funds will be a challenge. Diversification is good, but over-diversification will hamper your investment portfolio. Investing in ELSS according to the needs is the best decision.
Quick tips to look out for:
- Consistent performer is what you should look for rather than the current top performer.
- Large-cap oriented ELSS are less volatile. You can opt for them if you have a lesser risk appetite.
- Don’t wait for the last quarter to invest in ELSS. More than how to invest in ELSS, when to invest in them is also important. Start your investment from April or before.
- Choose the right fund for yourself considering your return profile and risk appetite.
- Don’t bet on a new ELSS fund every year. Instead, pick a good ELSS fund and stick to it.
Always remember that financial planning will give you better results when you spread your investments in a manner that they generate stable returns over time. Investing without thorough knowledge is not the sound way to move ahead with ELSS. You can find out more about ELSS and its advantages by visiting FinEdge Advisory and know which ELSS is the best option for you.
- 1 Here is the list of mistakes that investors should avoid while investing in ELSS:
- 1.1 Mistake 1: Beginning late
- 1.2 Mistake 2: Only looking for best performers
- 1.3 Mistake 3: Only looking for returns
- 1.4 Mistake 4: Falling in the dividend trap
- 1.5 Mistake 5: Investing only for tax saving
- 1.6 Mistake 6: Redeeming after the lock-in period
- 1.7 Mistake 7: Switching funds every three years
- 1.8 Mistake 8: Accumulating too many ELSS’s