Equity-linked Savings Scheme (ELSS) is one of the most popular investment options among investors. Why? They provide the dual benefits of tax-saving and wealth creation. However, a lot of investors are unable to enjoy the advantages of ELSS funds completely due to lack of knowledge. This article will provide with top 5 common mistakes made by investors while investing in ELSS mutual funds.
- Lump sum investing:Investing in ELSS funds via lumpsum mode during the last month of the financial year might not be the best way. Rupee cost averaging offered by SIP (Systematic Investment Plan) ensures that one average out their unit cost through the ups and downs of the equity market. If you plan to invest Rs1.5 lakh in ELSS in a financial year, SIP it every month for Rs 12,500.
- Ignoring investing style:Most investors ignore this attribute. Unlike other equity schemes, ELSS funds do not mention its market cap orientation. So, in the market, various schemes invest significantly into midcaps, while others stick to large caps or small caps or a combination of both. It’s important to understand how the returns are being generated, and that’s where a scan of their portfolio will help. Remember not to compare apples to oranges.
- Being trigger-happy:Several mutual funds underperform for a year or so but often make a strong comeback to top the return charts in 3 to 5 years. Investors mustn’t panic and sell at the primary instance of underperformance. Why so? Many a time, when the market takes cognisance and its stocks rally, it compensates more than enough for its temporary underperformance. Thus, an investor is advised to stay invested for the long-term.
- Loving large:The asset size of a mutual fund can be significant for several reasons. If it is among the best performing funds, more and more investors invest in it making it further bigger in the process. And also as the NAV of the fund appreciates, its size increases. Additionally, big-sized funds give comfort to its fund managers to manage the fund without worrying about redemption by some big-ticket investors.
- Redeeming immediately after lock-in period
One must stay invested in equity products for at least 5-7 years. You must refrain from redeeming your ELSS investments immediately after the end of the lock-in period to earn maximum returns. Compounding and rupee cost averaging works to deliver high returns in the long-term and can help you achieve long-term financial goals. You can also switch from one fund to another at the end of the lock-in period. However, if the fund is performing well, there is no reason to move out and invest in a different ELSS scheme.
Invest in ELSS today to enjoy long-term capital appreciation and tax-saving attributes. However, you should not consider ELSS funds as a mere tool to reduce your tax liability. You should completely analyse different investment options to understand lock-in period, risk, returns, and other parameters. Happy investing!