Want to Invest in ELSS Funds? Avoid these 5 Mistakes at all Costs

The ELSS schemes in mutual funds are an ideal alternative to the traditional ways to save taxes like PPF and ULIP. But before investing in these funds, make sure that you know the five mistakes commonly committed by new investors.

Most experts agree that Equity Linked Savings Schemes, popularly known as ELSS, is one of the best ways to save taxes. ELSS schemes are eligible under Section 80C of the IT Act and can be used to save up to INR. 1.5 lakhs in taxes in a fiscal year.

A major reason for the rising popularity of these schemes is the fact that they don’t just allow you to save taxes but also hold the excellent potential to generate handsome returns.

However, a large number of new investors end up committing deadly mistakes which costs them a lot of money at times. If you are planning to invest in ELSS, these are five common mistakes that you should avoid at all costs-

  1. Starting Late

The majority of the people do not begin planning their taxes until the last quarter of the fiscal year. Amid the last minute rush, they generally end up investing a lump sum amount in any of the top performing ELSS without a thorough analysis.

This could not only lead to wrong selection but also result in a cash crunch. Thus, it is better to start planning your taxes right when the fiscal year begins. If you want to invest in ELSS, SIP is mostly a better option as compared to lump sum investment.

  1. Exiting the Fund As Soon As the Lock-in Period is Over

ELSS has a lock-in period of 3 years which is lower than other tax-saving options like long-term deposits and PPF which have a minimum lock-in of 5 years. But a lot of investors redeem the units as soon as this lock-in of 3 years is over.

The lock-in period in these schemes is only for the tax break, and you can continue holding your position as long as you want. If your investment in ELSS has generated good returns by the end of the lock-in period and you don’t need the money, you should continue holding your position to earn even better profits.

  1. Investing in Multiple ELSS

Every time an ELSS becomes a top performer, a large number of investors end up investing in it. Over a period of time, these investors find themselves struggling with multiple ELSS from different AMCs in their portfolio.

Rather than investing in a new fund every time it delivers impressive returns, it is better to stick to 1-2 carefully selected schemes. This would make it easier for you to track their performance. If you want to invest more, you can stick with the plans you already have in your portfolio.

  1. Picking Schemes Solely Based on Returns Expected

While your primary goal with any type of investment is to generate returns, there are other important things that you should look into before selecting a scheme for your investment. The plan you choose should appropriately match you, your objective, and view.

For instance, if you’re a conservative investor, a scheme which takes a lot of risks to generate higher returns might not be the best choice for you.

  1. Not Considering ELSS after Exhausting 80C Limits

ELSS funds are equity schemes which allow you to save taxes too. Most investors generally fail to remember the primary objective of ELSS which is long-term wealth generation. As a result, they do not consider ELSS once they’ve already exhausted their 80C limits.

In fact, a lot of ELSS schemes generate returns better than large-cap equity funds. So, even if you’ve exhausted your 80C limit of INR. 1.5 lakhs, you can still consider ELSS for wealth generation.

ELSS offers a great combination of wealth generation and tax savings. If you are planning to invest in them, these are the five mistakes that you should certainly avoid.