People across India seem to be on a tax-saving spree. Everyone is on a lookout for investment options that can help them save taxes and get tax benefits up to INR 1.5 lakhs under section 80 C of Income Tax Act. Although there are many investment avenues you can try, nothing can beat the effectiveness of ELSS or equity linked savings scheme in the matter of tax saving. With a lock-in period of only 3 years, ELSS indeed makes tax saving easy for lot of tax payers.
However, people sometimes make certain mistakes while investing in such schemes. What these common mistakes are? Find out here-
- Not beginning early– A lot of people tend to start investing in ELSS towards the end of a financial year. But since they will need to produce documents for investment proof soon, this is not the best time to start investing in an equity linked savings scheme. First, because this could result in issues linked to cash flow mismatch. Secondly, because this could cause high cost of investment owing to market conditions that may be unfavorable.
- Opting for a new fund every year-Opting for a new ELSS fund every year, getting swept away by the performance of different ELSS funds, is a folly. This could make your portfolio have multiple funds of the same category, which is not good. Select your fund by doing a great deal of research on it and then stick to it. According to financial experts, you can go for, at max, two ELSS funds for a healthy portfolio.
- Redeeming or switching funds every three years-Because ELSS has a lock-in period of three years, most people switch funds every three years or redeem their funds on the completion of the first three years of the scheme. Remember, investment in ELSS is, after all, a Mutual Fund investment. And to benefit from the power of compounding in a mutual fund you must keep your funds stay un-redeemed for a longer period.
- Choosing the dividend option-ELSS is available in both dividend and growth options. But to reap maximum benefits and capitalize on the power of compounding, you should invest in growth schemes and not dividend schemes. Dividends in ELSS are not reinvested, so you don’t earn much in the long run. Even if you opt for the dividend reinvestment option, dividends are kept locked in for three years, owing to which it becomes difficult for investors to redeem the investment at one shot when needed.
- Being unaware of the fund category– Large cap ELSS funds are a safer option to invest in than small and mid-cap ELSS. Investing without understanding the category of the fund you are investing in can land you into unnecessary risks.
- Judging a fund based on its current performance- Another mistake is to choose funds on the basis of their recent performance. For good returns, you must select an ELSS fund on the basis of how consistent its returns have been over the years.
If these six glaring mistakes can be avoided while investing in an ELSS fund, then Tax Saving Investment will be a breeze for any tax payer. Besides, you will be able to make the most out of your investment.