ELSS (Equity Linked Savings Scheme) schemes are one of the most sought-after tax-saving instruments. This is owing to their handsome returns, transparency and ease in the process of investing.
With a lock-in period of just three years, ELSS funds are eligible for tax deductions up to Rs. 1,50,000 under Section 80C of the Income Tax Act. Through ELSS, investors can achieve capital appreciation and gain tax benefits. Before the policy’s benefits tantalise you and think of it as a magical formula for creating wealth, here are a few common blunders you may want to avoid.
Also Read: SIP and ELSS – A winning combination
- Investing a lump sum at the last minute: For investments to provide targeted returns, investors must have a goal in mind aligned with their plan of action. Most investors invest a large sum towards the end of the financial year under the duress of saving taxes. This increases their chances of investing in risky and volatile assets. It is advisable to invest early through Systematic Investment Plans (SIPs) so that there is ample time to research and choose a scheme that suits your goals and requirements. As ELSS schemes mandate a lock-in period of three years, a wrong investment can prove to be a costly mistake.
- Evaluating schemes on short-term performances: It is common for investors to commit the mistake of choosing a scheme based on its performance within the past six months – one-year period. Instead, it is wiser to look at the performance trends of a scheme over the last 3-5-year period rather than its current performance. For investments to multiply better, it is essential that the flow of returns remains steady. Assessing a scheme’s track record while keeping other influences in view is a must before committing to a scheme.
- Opting for dividend over the growth option: In equity investments, dividend plans act as deterrents to the growth of wealth, as with every pay-out, the value of the investment decreases. It also lengthens the lock-in period cycle e time the pay-out goes from the fund. For maximum returns, it is preferable to choose the growth option. This is because through the growth option money keeps getting reinvested thus creating wealth via compounding. The dividend option should be avoided unless there is a need for a periodic source of income.
- Redeeming as soon as the lock-in period ends: Experts believe that the mantra for successful equities is to -stay invested for at least 5-7 years or longer. Many investors opt for ELSS schemes owing to the lock-in period being the shortest among all other investment options eligible for 80 C deduction. If the scheme is performing well, then it is best to keep the investment intact to garner good returns in the long run.
- Investing in new funds after every lock-in period: Many investors become impatient and look to new funds when the lock-in period of a scheme ends. It is advisable to avoid micro-managing the fund performance; instead, wait and watch, especially, if market conditions are favourable. However, if the funds underperform consistently despite positive market trends, it is advisable to analyse the various factors responsible for the abysmal performance to decide the next step. It is best to not withdraw from the scheme in the long run if the returns are satisfactory.
Pouring your money in an ELSS scheme doesn’t translate into wealth creation if adequate homework is not done. A smart way of investing is by gaining a thorough knowledge of the dos and don’ts. There are ample ELSS schemes available, and it is best to research and choose one that is best aligned to your goals.