ELSS Tax Savings Fund Schemes: 5 Mistakes to Avoid

Saving income tax is always a priority for many of us. And among the various tax-saving options available, Equity Linked Savings Scheme (ELSS) funds have gained popularity. These funds not only help you save on taxes under Section 80C but also provide the opportunity to earn higher returns by investing in equity markets.

However, while ELSS offers great benefits, investors often make mistakes that can limit their profits. Let’s look at five common mistakes to avoid when investing in ELSS funds.

Mistake 1: Waiting Until the End of the Financial Year

Many people rush to invest in ELSS funds in March, just to submit their tax-saving proof before the deadline. This approach can backfire.

• The stock market may be at a high, meaning you’ll purchase fewer units.
• If the market drops, your investment will take longer to recover.

Solution:

Start investing in ELSS funds through SIPs (Systematic Investment Plans) right from the beginning of the financial year. This spreads your investments over time, reducing the impact of market volatility.

Mistake 2: Investing in Lump Sum

A common misconception is that a single large investment will yield better results. However, lump sum investments expose your money to market timing risks.

Solution:

Opt for SIPs instead of a one-time investment. Regular monthly contributions allow you to benefit from rupee-cost averaging, which reduces the impact of market fluctuations.

Mistake 3: Choosing Funds Based on Recent Performance

Don’t fall for the trap of selecting ELSS funds solely because they’ve delivered stellar returns in the past year. Markets fluctuate, and past performance isn’t always an indicator of future success.

Solution:

Evaluate a fund’s long-term performance—look at its returns over 3, 5, and 10 years. Choose funds that consistently outperform their benchmark and peers over these periods.

Mistake 4: Opting for the Dividend Option

Choosing the dividend option in ELSS funds can reduce your returns for two key reasons:

1. Higher taxes: Dividends are taxable at your slab rate.

2. Reduced compounding: Dividends take money out of your investment, limiting the growth potential of your principal.

Solution:

Select the growth option instead of the dividend option. This allows your investments to grow without interruptions, maximizing returns over the long term.

Mistake 5: Spreading Investments Across Too Many Funds

Investing in multiple ELSS funds may seem like diversification, but it often leads to confusion and underperformance. Managing too many funds can dilute returns and make tracking difficult.

Solution:

Stick to 1 or 2 well-performing ELSS funds. For example, if you plan to invest ₹5,000 per month, allocate it across a maximum of two funds.

Bonus Tip: Don’t Withdraw Right After the Lock-In Period Ends

ELSS funds come with a mandatory 3-year lock-in period, but that doesn’t mean you should redeem your investment as soon as the period ends. The true potential of ELSS funds lies in long-term compounding.

What to do instead:

Evaluate your fund’s performance periodically.

Stay invested as long as the fund aligns with your financial goals.

ELSS funds are a great tool to save taxes and build wealth, but only when approached wisely. By avoiding these five common mistakes, you can maximize your returns and create a solid financial foundation. Start early, invest consistently, and stay patient—your future self will thank you!

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