Mistakes to avoid while investing in ELSS

What is ELSS?

ELSS or Equity-linked Saving Scheme is classified under the mutual fund category. It is a long-term equity mutual fund investment with a minimum lock-in period of 3 years for an amount as small as INR.500. ELSS mutual funds offer EEE (exempt-exempt-exempt) benefits, long-term capital growth and high returns even during unstable capital market conditions. Further, it attracts tax deductions of up to INR.1.5 lakh annually under Section 80C of Income Tax Act, 1961. The amount that you receive at withdrawal as well as the returns are also tax-free. ELSS mutual fund investments enjoy high capital growth as a result of the power of compounding and the rupee cost average of your investments.

6 Mistakes to Avoid While Investing in ELSS Mutual Funds

Select the best ELSS funds in 2018 without making these common mistakes:

Investing towards the end of the financial year

The approaching tax season often makes many take active steps in contributing towards tax-saving investment plans to enjoy tax benefits at the end of the financial year. However, being a late beginner prevents them from being eligible for as many returns as they could have had they been an early starter. The ideal time to invest in an ELSS mutual fund is the beginning of the financial year, preferably in the month of April. This is because tax-saving schemes like ELSS mutual funds take a considerable time to fetch returns. Besides, investors may also face high investment costs if the capital market is unfavourable at the end of the financial year, defeating the purpose of investing in an ELSS. You may either plan your ELSS scheme by opting for an SIP in a fund of your choice or you can break into down into easy instalments payable throughout the year to get the advantage of rupee cost averaging.

Lack of clear financial goals

Your financial goals determine the market cap that will be best suited for you. Your goals, coupled with your risk appetite, horizon of investments and return profile, will help you decide whether you should opt for a small-cap or mid-cap or a large-cap ELSS mutual fund investments. Large-caps are long-term investments that are accompanied by low risk and stable returns, while mid-caps have a comparatively higher risk and ensure stable returns. Small-caps are ideal for those with a high risk appetite and offer the highest returns within a short period of time. AMCs (Asset Management Companies) of a portfolio that comprises of a combination of large, medium and small-cap schemes, basis the return profile and risk involved with the ELSS mutual funds schemes. You should closely review the nature of holdings, prospect of returns and risk profile to ensure that each of these factors meet your requirements and then select an ELSS mutual fund accordingly.

Analysing only the existing performance

One of the biggest mistakes that an investor can commit is evaluating an ELSS scheme solely on the basis of the current performance of an ELSS. This scheme, like all other equity mutual fund investments, should be selected after a thorough research of the prospective performance of the funds and their holdings in the future because the capital is deployed in equities.

Selecting Dividend Plans in ELSS

Dividend Plans are not favourable for equity investments as it impedes capital growth by cutting down the power of the value of your investments at every pay-out. Though you will be eligible for tax exemptions of up to INR.1.5 lakh under Section 80C, you lose out on attracting the highest capital gains.

Withdrawing immediately after the lock-in period

Another mistake investors tend to make is withdrawing the amount immediately after the completion of the 3-year lock-in period. Lock-in period refers to the minimum time span for which you have to invest in the scheme. However, it does not indicate that it is compulsory for you to withdraw the amount as soon as the lock-in period is over. Withdrawing the money not only makes you lose the strength of investment, but also prevents you from attracting higher returns on being invested for a longer tenure.

Opting for multi ELSS investments simultaneously

It is advisable for an individual to invest in one or, at the most, two ELSS mutual fund schemes at any point of time. This is in contrast to the popular opinion that tax benefits a particular ELSS investment can be availed only once, and therefore, you have to invest in a new one in the next financial year to be eligible for the same tax deductions again. However, in reality, investing in several ELSS schemes simultaneously merely adds multiple holdings belonging to a similar category. This prevents effective management of your portfolio and also creates the hassle of dealing with multiple holdings.

Browse through the list of the best ELSS funds to invest in 2018, do a thorough background check of each of them and analyse your financial goals to decide on the most suitable ELSS mutual fund for yourself.