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Tax planning/saving is one of the most important aspects of financial planning that every investor must take into account for building a strong portfolio. In order to succeed in sound and sustainable financial planning, one needs to save taxes, while growing their invested money through mutual funds.
The dual benefit of saving taxes and growing wealth is present in ELSS funds offered by mutual funds India. ELSS stands for equity linked savings schemes and also referred to as tax saving mutual funds that investors can use to claim a tax deduction of upto Rs 1.50 Lakhs from their taxable income as per the Income Tax Act, 1961. In comparison to other tax saving investment options available in the market, ELSS mutual fund schemes offers superior returns, helps to invest in stocks without taking direct risk and also generate long term wealth. In addition to these, it offers the shortest lock in period and when continued with patience, it can help investors reach desired financial goals.
How to start investing in ELSS funds?
To start investing in tax saving mutual funds, an investor needs to be KYC compliant. Investments can be made online or offline through a mutual fund distributor. A folio number is allotted to the investor post investments are made and units allotted. Units are allotted on the investment day and the NAV applied is of the date of investment. The no. of units investors get depend on the mutual fund NAV of the scheme.
Since it is a very good investment option for tax saving investors, here are a few mistakes one must avoid while investing in ELSS:
- Do not redeem immediately after the lock in period – ELSS mutual funds have a 3 year lock in period but investors shouldn’t withdraw the money immediately after this period, unless there is a financial exigency. Given the power of compounding, ELSS funds, possess the capability of generating wealth over the long term and meeting investor financial goals. Hence, one should consider remaining invested over a longer tenure.
- Do not select the fund based on short term performance – A common mistake made by investors, especially new ones, is that they tend to choose a mutual fund based on recent performance. Mutual Fund investment gives market linked returns which means the returns generated at a particular point of time depends on the conditions prevailing at that time as well as the strategy devised by the fund manager. A fund that performs well in the short term, might not necessarily perform the same in the long term as well. Hence, investors should make a wise choice for investment based on the long term performance of ELSS Fund.
- Do not over-diversify – An ELSS portfolio is diversified across various large, mid and small companies across various sectors, hence, investing in many ELSS funds will not necessarily give you additional diversification benefits. Further, if some schemes underperform, your overall portfolio performance may suffer. If your scheme is underperforming versus its benchmark and peers over a sufficiently long period, then switch to a better performing ELSS.
We took an in depth look at tax saving mutual funds and tried understanding what investors should preferably avoid while choosing to invest in them.