Top 5 mistakes investors should avoid while investing in ELSS

Investing in a sensible tax saving instrument will always help you not only bring down your tax liability but also earn some decent returns. One way to save tax and earn long term capital gains is by investing in Equity Linked Savings Scheme. Also referred to as ELSS, an Equity Linked Savings Scheme is a mutual fund scheme that comes with a three year lock-in and a tax benefit. You might not be aware about ELSS is actually a popular tax saving option not just among mutual fund investors but among a large number of Indian tax payers.

ELSS is one of the best investment options out there for two primary reasons – you can save up to Rs. 1.5 Lacs in taxes by investing this amount in ELSS. Second, you can start investing in ELSS with a sum as low as Rs 500 per month. Investments in ELSS should be based on a clear investment decision and focused financial planning. Failing to do so may negatively impact your overall investment portfolio.

Here are a few common mistakes which investors should avoid while investing in ELSS

Avoid investing when the tax season arrives

A common mistake that most investors make is that invest a lump sum in ELSS at the end of the fiscal year right before they have to submit investment proof to their respective HR. The only problem is that in case you are facing a cash crunch at that point in time, you might not have enough financial resources to make a lump sum investment towards the ELSS scheme. This is why the best route to ELSS investing is the SIP route. A Systematic Investment Plan (SIP) allows retail investors to save and invest a fixed sum at periodic intervals (typically every month) in an ELSS fund. You can start investing in ELSS via SIP at the start of the fiscal year and enjoy various SIP benefits like rupee cost averaging and power of compounding. You can also use the SIP calculator, a free online tool that lets you calculate the total assumed returns earned through disciplined and regular SIP investments.

Avoid overdiversification

What some new investors end up doing is that they invest in a new ELSS scheme every new year. Remember that if you want to witness your investments compound and grow over the long run then it is essential for you to continue investing in a single ELSS scheme. Do not invest in more than two ELSS funds else you will end up over diversifying your investment portfolio. Only switch to another tax saving fund if the ELSS fund in which you invested isn’t performing as per your expectations.

Do not redeem after the lock-in period

If you compare other tax saving instruments under Section 80C of the Indian Income Tax Act, 1961 ELSS has the shortest lock-in period. But just because ELSS has a short lock-in period does not mean that you redeem your investments after that. To build a long term corpus you need to remain invested for at least 5 to 7 years.

Asset allocation is important

Different ELSS funds capitalize on different markets. Investors should carefully understand the different ELSS funds and only invest in a scheme whose investment objective aligns with that of theirs. Only consider an ELSS scheme whose investment portfolio matches the kind of equity exposure you are seeking.

Avoid highest performers

Since you will be investing in the ELSS fund for the long haul, do not settle with a scheme that has been the previous year’s highest grosser. Instead, settle with a fund that has a track record of delivering consistent returns.