5 Mistakes to Avoid While Investing in ELSS Fund

(As on date 24^th jan 2020)

Paying annual income tax is a tradition for most salaried individuals. But if one decides to plan their finances well in advance, they may be able to avoid paying taxes. That’s because there are several tax-saving avenues available for tax payers, and they might be able to save themselves from paying taxes, only if they manage to invest smartly. Unfortunately, due to a lack of knowledge about tax saving avenues, several people end up paying taxes every year.

Section 80C of the Indian Income Tax Act, 1961, has several tax saving instruments, where investors, depending on their investment objective, risk appetite and investment horizon, can invest (if they want to) and claim tax deductions of up to Rs. 1.5 lakhs*. Equity Linked Saving Scheme (ELSS) is one such tax saving instrument that falls under Section 80C, in which investors may consider investing. Investors, if they wish to, can save tax up to Rs. 1,50,000 annually by investing in ELSS funds and claim tax deductions to reduce their tax liability. ELSS funds come with a mandatory lock-in of three years, which means ELSS holders need to hold on to their fund for a minimum period of three years.

But ELSS, as the name suggests, is an equity investment scheme. Having said that, if you want to save taxes and, at the same time, have the willingness to take some risk in order to invest in equity markets that have the potential to fetch some returns, you may invest in ELSS.

However, there are certain mistakes investors need to avoid in order to try and make their ELSS fund investment fruitful.

Here are five common mistakes to avoid while investing in ELSS fund:

1. You may want to avoid last minute rush: As stated at the beginning para of this article, some investors, due to lack of adequate knowledge, turn to tax saving investment schemes like ELSS at the last moment. The problem here is that rushing towards ELSS investment at the final hour may force investors to invest in an ELSS fund or any tax saving instrument through a lump sum. Paying the entire investment amount at the beginning of the investment cycle may not only result in cash crunch but may also refrain investors from making the most out of SIP. Systematic Investment Plan or SIP is a systematic approach where investors can decide when and how much amount to direct towards their investment. All investors need to do is instruct their bank, and a predetermined amount will be deducted from their savings account and directed towards their ELSS investment on a predetermined date every month. But if they invest at the last minute, they might not be able to make the most out of SIP benefits like the rupee cost averaging

2. You needn’t necessarily exit after three years: By now, you must be aware that ELSS funds come with a statutory lock-in of three years. This means you cannot redeem your fund until the lock-in period. But this doesn’t mean that you must exit once the lock-in is over. Remember that ELSS is a tax saving fund, and hence, you may choose to remain invested even after the lock-in, that too if you wish to. So let’s say hypothetically if the ELSS fund you invested in is performing well, you can choose to not exit it. But if you remain invested, you may increase your chances of earning some returns. But this again will solely depend on the investor’s decision, and they may stay invested in an ELSS fund as long as they wish to.

3. You may want to avoid investing in too many ELSS funds: Due to advancements in internet technology, it may have become easy to buy ELSS online. Buying ELSS online is quite a hassle-free process, and due to this, investors may find it easy to purchase one from several ELSS funds made available by numerous AMCs. Also, because investing in ELSS has its own merits, tax payers may prefer investing in multiple ELSS schemes. However, holding various ELSS fund investments may not be beneficial for an investor’s portfolio. That’s because it is expected from investors to track their ELSS investments regularly. So to keep track of multiple ELSS fund investments overlooking certain parameters, like constantly monitoring the fund’s performance, checking whether the fund is able to meet its benchmark, etc. can be a tedious task. An average tax payer may not be able to track multiple ELSS funds at one time. Hence, investors may want to avoid investing in numerous ELSS funds.

4. Try not to avoid investing through SIP: Apart from the fact that the SIP approach may help investors benefit from the rupee cost average, investing in an ELSS fund through SIP may also help investors instil the discipline of saving regularly.

5. Try not to go beyond your risk-appetite: Yes, it is true that ELSS is a tax-saving mutual fund scheme. But investors should not let their ELSS fund investment sync out of their risk appetite and financial plan. ELSS may be one way to diversify your portfolio, but remember that you are primarily investing in ELSS to save tax. Yes, it also offers you an opportunity to invest in equity and try and increase your chances of earning returns, but make sure that you stick your financial plan and avoid investing in just one type of fund.

ELSS investments are one way to save taxes. Avoiding these common mistakes might help investors in making some profits too.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.