Investing in ELSS Funds? Avoid these 5 Costly Mistakes!

Posted by Raghav Mehera on May 28th, 2018

One of the main reasons for investors to opt for Equity-linked mutual fund schemes (ELSS) is that it helps them save tax under Section 80C of the ITA. Very often, they forget that these schemes offer significant other benefits like – long-term capital growth due to the power of compounding, inflation-beating returns and much more. This makes them commit vital mistakes while choosing the fund.

Here, in today’s article, we give you a list of common mistakes made by investors when opting for equity-linked savings schemes.

Mistake #1: Waiting until the Last Minute to Invest

Experts state that very often people invest in ELSS as a last-minute tax-saving resort, right before the end of the financial year. This is a cardinal mistake as it doesn’t give you time to analyse, do your research and pick the right scheme that works for you.

This is highly dangerous as the plan you choose may not suit your risk appetite, your financial goals and objectives. Additionally, when investing at the last minute, you’re likely to invest a lump-sum at one go, without investing as regular SIPs. This means you don’t get the benefits of SIPs like rupee cost averaging, etc.

Tip: Never wait until the last minute to invest in ELSS. Take your time, do your homework and choose the right scheme that meets your requirements.

Mistake #2: Timing the Market

Very often, new investors keep on waiting for the right time to begin their investments. This is a futile attempt as the market is highly unpredictable and even seasoned investors aren’t able to do so with accuracy.

Once you decide to invest in ELSS, you should develop the patience to ride through the ups and downs of the market without panicking. The best way to get the most benefit out of an ELSS is to stay invested for a long time.

Tip: The best time to start your ELSS investment is right now.

Mistake #3: Redeeming your Savings Right After the Lock-in Period

This is again another common mistake committed by investors. An ELSS mutual fund scheme has a lock-in period of three years. Most investors make this error of redeeming their funds right at the end of the lock-in period. By doing so, they lose all the benefits that the fund acquired over the 3-year period. ELSS offers the most benefits over the long term. So, try to stay invested as long as you can, to reap the maximum rewards.

Tip: At the end of the lock-in period, evaluate the performance of the fund and decide to redeem or continue, based on its performance.

Mistake #4: Not having a Clear Understanding of the Fund Type

Fund houses offer several types of ELSS funds depending on the type of stocks like large, mid and small cap. The risk and return for each of these types vary significantly. While large-cap funds are considered more stable than small and mid-cap firms, the yields may be lower, when compared to the latter.

While choosing a fund, make sure to analyse its risk levels and compare it with your investment horizon and risk appetite to pick the right one.

Tip: The scheme document is a good place to start. Try reading it, to know more about the risk levels and return status.

Mistake #5: Opting to Receive Dividends

This is one of the biggest mistakes made by investors. When you choose to accept dividends you are depriving yourself of further income. When you receive dividends, the revenue generated from your fund is not re-invested in it, thereby restricting your growth. This means you don’t benefit from the power of compounding, reducing your returns significantly.

Tip: Opt for dividends only if you require a periodic income.

ELSS is one of the best multi-featured investment tools out there. It not only offers you tax savings but also helps you grow your wealth, when handled correctly. Make the right choice by avoiding the errors listed here.