Are you looking for an investment to achieve your long-term financial goals? Do you want the twin benefits of inflation-beating returns along with tax savings? You may consider investing in ELSS or the equity-linked saving scheme. It is a tax-saving mutual fund that puts money mainly in equity and equity-related instruments.
Your investment in ELSS is eligible for a tax deduction up to a maximum of Rs 1.5 lakh per financial year, under Section 80C of the Income Tax Act, 1961. It also has the shortest lock-in period of three years among all tax-saving investments under Section 80C. However, you may consider avoiding some common pitfalls while investing in ELSS.
Let’s take a look at four mistakes to avoid when investing in ELSS.
Avoid investing at the last minute
You may invest in ELSS and submit the investment proof to your employer to save taxes. However, you may consider avoiding the last-minute rush, where you may have to invest a lump-sum amount in the ELSS. It may lead to a cash crunch where you could struggle with your finances.
You may invest in ELSS only if it matches your investment objectives and risk tolerance. You could consider attaching financial goals to all your investments.
You may put money in ELSS at the beginning of the financial year to achieve your long-term financial goals.
Don’t time the market
You may consider investing in ELSS through the systematic investment plan or the SIP. It is a method of staggering your investment in the mutual fund over some time. You could avoid timing the market if you invest in ELSS through the systematic investment plan instead of a lump sum amount.
You may get the benefit of rupee cost averaging if you invest in ELSS through the SIP. You would invest a fixed amount at regular intervals, irrespective of whether the markets are high or low. It helps you purchase more units of the ELSS when the stock markets are down and lesser units when markets rise. You could average the purchase cost of units over some time.
You may consider investing in ELSS if you are a salaried employee. It teaches financial discipline and prevents a cash crunch, as you invest at regular intervals depending on your income.
Also Read: Should You Invest in Mutual Funds When the Sensex is Rising?
Investing in many ELSS funds
You may consider having a maximum of two ELSS funds in your portfolio. You must select ELSS funds that have performed consistently over three to five years. Avoid investing in many ELSS funds as you could struggle to monitor your portfolio. You may replace an ELSS fund from your portfolio only if it doesn’t perform well over some time.
You may invest in ELSS funds that match your risk appetite. Equity-linked saving schemes may put money in stocks across market capitalisation. Take a look at the portfolio of the ELSS before you invest your money.
You may consider investing in ELSS with a high-exposure to large-cap stocks if you have a lower risk appetite. However, you may consider investing in ELSS funds with higher exposure to mid-cap stocks if you are an aggressive investor.
Redeem immediately after the lock-in period
You may feel tempted to redeem your investment in the ELSS immediately after the three year lock-in period. However, you must avoid doing so if you want to maximise your returns. You could consider investing in ELSS for at least five to seven years if you want to achieve your financial goals.
You may compare the performance of your ELSS against a benchmark such as the S&P BSE 200 or the Nifty 200. You could stick to your investment for a longer time if it consistently beats the benchmark.
You may pick an ELSS which has consistently outperformed the benchmark over time. However, past performance doesn’t mean the fund would perform well in the future. You could consider studying the portfolio of the ELSS as it invests in stocks across market capitalisation. In a nutshell, you may invest in the ELSS for wealth creation and tax saving if it matches your financial goals and risk appetite.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
