Other than its lesser lock-in period and impeccable track record of beating inflation, typically, people look to Equity-Linked Savings Scheme (ELSS) as investments for long-term capital growth and tax savings. It’s even scored over fixed deposits, PPF, and other tax-saving instruments. However, simply investing a certain amount will not necessarily ensure results. So, it’s crucial to watch out for common mistakes investors make while investing in ELSS.
Here are the five common mistakes investors make.
1. Last-minute investment
Investing a lump sum amount to save on tax is an incorrect approach and ill-advised. Other than putting a strain on your cash flow, it may force you to invest in mutual funds schemes that are not right for you. It’s better you invest a smaller amount regularly through SIP, say INR 5,000 every month. This way, you save in a disciplined manner and avoid the last-minute rush. Don’t think of ELSS as a means of saving tax; it has the potential to generate enormous wealth in the long run.
2. Investing in many ELSS funds
While you can easily purchase multiple mutual funds online, investing in several ELSS funds is akin to putting all your eggs in the same basket. It’s something you should avoid because it defeats the purpose of an optimally diversified portfolio and hinders your corpus’ growth. It’s best to hold one to two funds that you can easily monitor and track.
3. Redeeming too soon
Amidst other tax-saving instruments, ELSS has one of the shortest lock-in periods of 3 years. While it’s tempting to redeem your investments at the end of 3 years, you should leave it in for longer (5 to 7 years) to maximize your returns, make the most of your investments, and achieve your financial goals. Even if your scheme is consistently delivering well and outperforming the benchmark, don’t pull out. Instead, pump in more investments and wait. Patience is key if you want sizable wealth down the road.
4. Choosing dividend instead of growth
You might choose the dividend option, as it’s tempting to get back a portion of your investment amount at intervals. Here, you lose the opportunity of creating wealth over a longer period. However, if you’re investing for the long-term, it’s best to choose the growth over the dividend option. The growth option reinvests your money so that you can amass a generous corpus.
5. Focusing only on best performing funds
As an investor, don’t merely look at the returns for a one-year period. More than short-term gains, you need to keep an eye out for consistency and sustainability of returns. Pick schemes that show steady growth over a span of 5 years.
Investment in mutual funds is an art. If you want to create wealth, you need to seek the advice of qualified financial planners. Try DIY or online investment apps like Moneyfy and chalk out a strategy that helps you achieve your goal with minimum risk.