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7 Mistakes to Avoid While Investing in ELSS Mutual Funds

  By : , Delhi, India       20.12.2017         Phone:-          Mail Now

While your investment in Equity Linked Savings Schemes (ELSS) can grow your wealth, just putting the money in an ELSS fund doesn’t assure your well-being. To grow your wealth and meet long-term goals, it is essential to avoid the following mistakes while investing in ELSS:

Timing Market Entry

Many people hold on to their money as they wait for the ‘right’ time to enter the market. However, there is a high amount of uncertainty, which makes it difficult to correctly predict the future events and their impact on the market. Unless you are a seasonal investor with a complete understanding of the market, the chances are that you might not be able to identify the correct timing.

Therefore, instead of timing your entry, focus on identifying and investing in good ELSS fund options. The best way to defeat the market volatility is to invest in ELSS regularly in a disciplined manner through systematic investment plan (SIP) which averages the cost of investment over the long run and curtails the impact of market fluctuations over the investment. Once you have invested, have the patience to tide through the rough and tumble conditions of the market.

Tip: There is no ‘perfect’ time to start your investments. The best time to start your investment is Now.

Investing at the last minute

Most of the people start investing only in the last few months of the year. However, leaving it to the last minute can lead to inadequate time to identify your goals and create a viable investment plan. Remember, if you choose the wrong ELSS, you will not have the option of correcting the same for the next three years. However, when you start investing early, you have ample time to pick good ELSS funds as per your risk appetite and goals.

Tip: Utilise the power of time to choose and invest in the best ELSS fund option.

Redeeming soon after the lock-in period is over

Though ELSS funds allow you to withdraw money after three years, stay away from redeeming soon after the lock-in period is over. The longer you remain invested, the more you would be able to gain from the power of compounding and rupee cost averaging.

Tip: Stay invested in ELSS for a minimum five years and use it for your long-term goals.

Too much focus on short-term performance

Most of the investors choose a fund on the basis of its six-month or one-year returns. A good short-term performance could be due to fund manager’s personal bias or sheer good fortune, and therefore, one must carefully assess the portfolio construct, and most importantly, its last five-years performance. The scheme in which you are intending to invest should be a consistent performer for the last five or ten years.

Tip: Compare the fund’s performance with that of its comparable category over a period of five or ten years.

Focusing only on the returns

Though, you are investing money to fetch returns, stay away from choosing the fund on the basis of the returns only. Rather, you must consider the nature of the scheme and choose it if it matches your investment needs.

Tip: If you have a conservative style of investing, go with the scheme that comes with the same investing criterion.

Investing to save tax

As investments up to Rs 1.5 lakh in equity-linked investment options are tax-exempted under Section 80C, many investors flock to such schemes to invest a lump-sum amount, especially in January and February. However, investing lump-sum amount into such funds not only increases the market risk, but it also makes it tough to avail the benefit of rupee cost averaging.
While, there is nothing wrong in investing to save tax, investing ‘only’ to save tax is not a wise decision.

Tip: Consider tax only as a topping on a cake, i.e., your investment. Your cake would taste delicious, even without topping!

Choosing the dividend option

Most of the investors prefer those ELSS funds which offer them dividend option. However, they fail to understand that dividends are paid to them from their own money. Further, unlike growth option, gains are not reinvested in dividend payout option, and hence not available for compounding, resulting in lower returns in the long run. So, it is advised to stay away from dividend option, unless you need periodic income.

Tip: Go with a growth option scheme to create wealth in the long-run.

Though this is not an exhaustive list of mistakes; we can assure you that if you avoid them, you can certainly improve your chances of success.

TAGS: ELSS,   Equity Linked Savings Schemes,   ELSS Mutual Funds,  

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