New to investing in Equity Linked Saving Schemes (ELSS)? Here is a list of things you must avoid while investing in them.
One of the best ways to save tax is by investing in ELSS (Equity Linked Savings Schemes). But don’t assume that just by putting money into an ELSS fund, it will work its magic. While investing in them can be totally tantalising, it also comes with a host of mistakes you’re most likely to make. So, here’s what not to do while investing in an ELSS fund:
Additional Reading: ELSS 101: To Invest Or Not To Invest
Don’t begin late
Being a Late Kate or a Late Latif will not help you. Although we’re moving towards the end of the year and this advice may seem like it came a little late, it’s always crucial to invest in any tax-saving instrument early. By starting early through a SIP (Systematic Investment Plan) or STP (Systematic Transfer Plan), you can maximise returns. And this will also help you leverage your time to research on the best possible options.
Always keep in mind that when you pick the wrong ELSS, you don’t have the option of correcting it for the next three years. Hence, it’s advisable to start investing in ELSS in your early twenties or as soon as you start working.
Don’t Judge Schemes On Short-Term Performances
This rule holds well not just for ELSS but for all Mutual Funds. Experts say that the scheme you choose shouldn’t be based on its performance in the last six months to a year which has been showing higher returns. Instead, pick a scheme that has been a consistent performer for at least five years!
Upon research, you may be tempted to pick a scheme that has shown a considerable amount of returns to investors over a short-term period. But remember that consistency is key. The same scheme may underperform the next year and you could very well lose money. So, it’s better to bet on schemes that have been consistent over a longer duration of time.
Additional Reading: How Is ELSS Different From A Mutual Fund
Don’t Just Look At Returns
This may sound a tad bit ironic and may make you wonder if returns aren’t the primary reason for investment. But, sometimes, it’s also important to pick the investment philosophy that matches your investment style. For instance, if you are a conservative investor, a scheme that takes a lot of risks to stay on top may not suit you because you’d also risk losing a lot of money. And that’s not you as an investor. So, go for a scheme that has the same investment style as you do.
Additional Reading: 5 Tips To Select The Best ELSS Product
Don’t Fall Into The Dividend Trap
It’s common for investors to be lured into the dividend trap while investing in ELSS. But the fact of the matter is that this dividend is paid to you from your own money. And unless you’re in need of a periodic income, you shouldn’t opt for the dividend option. If your goal is to create wealth, then you must stick to the growth option.
Don’t Invest Only For Saving Tax
Although an Equity Linked Savings Scheme will provide you with tax benefits, they are equity schemes at the end of the day. While they can be extremely risky, they are equally rewarding. So, when you’re looking to invest in an ELSS, be sure to also look at other things like the risk, lock-in period, returns etc.
Additional Reading: Saving Tax With ELSS? Try Direct ELSS Funds For Better Returns
Don’t Redeem Immediately After the Lock-in Period
ELSS has a three-year lock-in period and often investors tend to pull out money as soon as the lock-in period is over. But guess what? You don’t have to do it if your fund is performing well. Also, because this investment invests in equity, you should be prepared to stay invested in it for at least five to seven years to garner good returns.
Don’t Switch Funds Every Three Years
Some investors will wait for the lock-in period to get over to shift to another fund. This is common. But jumping from one fund to another just because some other fund is giving you better returns is not the way to invest in ELSS. If you think your fund is underperforming, it could be due to several reasons, and one of them could be the size of the fund.
So, what you can do is find out the actual reasons for the fund’s underperformance. And only when you think the fund is underperforming despite the market blooming for a long time, you should consider moving to another fund.
Additional Reading: Is It Wise To Reinvest ELSS Money Every Three Years?
Don’t Accumulate Too Many Schemes
Too much of anything is bad. Likewise, some investors invest in a different ELSS every year. If you’re able to manage your portfolio effectively, you can very well go ahead and get one each year. But having multiple funds can be difficult to manage as this will lead to over-diversification and your portfolio will be hard to monitor. In the end, your inefficiency to manage the funds can cost you your money!
Investing in equity schemes are profitable when you have done your homework. And it all begins with knowing the dos and don’ts. By investing smartly, you not only create wealth but are well prepared for your future too. But make sure you are reading the fine print before you invest in any product. That said, we have plenty of products that you can invest in.