If you are planning to save your taxes, then mutual funds are the best option. While different mutual funds are tax-efficient, not all of them provide tax benefits. Equity Linked Savings Schemes is one category of Mutual Funds which provide the investors with the tax benefits.
Equity Linked Savings Schemes are the type of open minded and diversified equity schemes that are offered by the mutual funds in India. These schemes offer tax benefits under the section 80C of Income Tax Act 1961.
With the tax saving season has just arrived, a lot of people are planning to invest their savings in equity linked saving schemes, where they receive equity like returns along with the benefit of tax savings. However, the investors make quite a lot mistakes while investing in this sort of Funds. Today, we are going to learn about some of the common mistakes while investing in ELSS.
Be Picky While Choosing Schemes
This rule can be applied for all the Mutual Funds. When you are planning for making an investment make a research. Experts say that never judge any scheme based on its performance for the last 6months to 1 year. Always choose the plan or scheme which has a consistent performance for the last 4-5 years. People may get tempted seeing the performance of the scheme and will not think twice to invest on it. This can be uncertain. It may be possible that the same scheme can underperform the next year and can put you in a loss. So, it’s better to bet on the schemes that remain consistent for a longer period of time.
Don’t Get Compelled with The Returns
Never go for an investment scheme that does not match your saving scheme style. It is very important to pick up an investment style. This can be a bit risky because you are risking a lot of money on it.
Beginning Late in The Year
Many of the people start investing in ELSS Funds at the end of the financial year. This is a huge mistake. It is a poor strategy for saving money. This could lead to the cash flow issues at the end of the year. Another big problem is that investing money at the end of the financial year forces the investor to invest a lump sum amount. This technique can be a huge risk. This can create risk in the market timing. If the equity position is at a good stake then it can result in high valuations. The investors can end up purchasing the units at high valuations which in turn affects its return.
Don’t Mix Up Too Many Schemes
There’s a famous saying that “Too Much of Anything is Bad”. Same goes for the ELSS investment scheme. Some of the investors invest in different ELSS in every year. If you are good at arranging things at order then go ahead. Get one each year. But having multiple numbers of funds at the same time can be difficult to manage and can lead to a confusion when it comes to monitoring the portfolios. If you are inefficient to managing the funds then better to skip that.
Don’t Fall into The Dividend Trap
It has been observed many times that the investors get trapped in the cave of the Dividend trap while investing in ELSS. But the matter of fact is that the dividend is paid to you from your money. Until and unless you are not in the need of periodic of income do not take the risk for choosing a dividend option. If your goal is to create wealth, then you must stick to the “Growth Option”.
Do Not Redeem Quickly After Lock-In Period
The ELSS Scheme offers a 3 year- lock-in program and many of the investors try to retrieve the cash as soon as the Lock-in Period gets over. But you don’t have to do this if your fund runs extremely well. So, it’s better that you stay invested and save for a time period of 5-7 years for a good healthy return amount.
Do Not Invest Only for Savings Tax
Though the Equity Linked Savings Schemes are quite tax-friendly and provide you with quite efficient tax benefits. But at the end of the day, they are Equity Taxes. They can be quite risky as well as rewarding. So, when you are planning to make an investment on ELSS, make sure that you take a look at the other things like risk performance, lock-in period etc.
Do Not Make a Switch Frequently
It is often found that the investors make the switch after every three years. This jumping from one fund to another fund just because it is giving a good performance than the other funds is not a good idea to invest in ELSS. If you think that your fund is underperforming, then there could be many other reasons behind that- which may be because of the size of the fund etc. So, when you think that your fund is under performing then instead of market blooming for a long time, try to move from one fund to another.
Thus, investing in the equity schemes are no doubt profitable but they can also cause you risk in investing your money. So before jumping into the investment well, have a little research work done. Know about the do’s and don’ts of the different schemes. In short, Invest Smartly, which can help you in future.