ELSS owe most of their reputation to the tax deduction aspect of investment it provides. While that is true and the attraction point for most investors, you should not limit your vision but use this investment instrument to its full potential. Here are some common mistakes people make while choosing Equity Linked Saving Schemes (ELSS).
1. Redeeming as the lock-in period ends:
ELSSs are traditionally the best performing schemes over a longer period of investment; while a smaller lock-in period has its perks, it may be wise to hold onto your investment for longer, and let it give to you all its gifts. The equity-linked scheme is meant to be used for long-term investment and to use the power of compound interest over a relatively long period of time (5-7 years).
2. Investing at the last minute:
A very common practice is thinking about tax deduction at the time of tax filing. Not only is this careless, it can lead to negative results, as can any investment without proper research and making sure it fits into your investment profile and risk appetite. It is best to start investing from the start of the financial year, in the form of SIP. This gives you the extra benefit of price averaging and eliminates the need for timing the market. Which brings us to the next most popular mistake.
3. Trying to time the market:
It takes a considerable amount of time, energy, effort and research to come up with effective strategies to be able to time the market. Unless you want to spend upwards of 10 years to pursue this field and effectively make a career as a fund manager, its best to leave the professional work to the professionals.
Secondly, Equity linked funds are meant to be kept for an extended period of time. Which means, the starting point doesn’t really matter, as your money will go through some ups and downs that you need to hold on through.
4. Not paying attention to the type/category of the fund:
ELSS are divided into short, medium and large cap funds. Large cap funds tend to be less volatile while small cap funds are more responsive to the market. The investor should identify the amount of risk they are willing to take before investing. For example, investing in an aggressive risk-taking small cap fund with a 3-year investment horizon may not be the smartest thing for a conservative investor to do.
Diversification is the rule of the game but over diversification can be as bad as no diversification. Not only do you lose the option to re-allocate your money, but it also makes it hard to track returns in a consistent manner.
It is commonly seen that an investor will invest in a new ELSS every year, for 5-7 years. This leads them to end up with multiple funds that become harder to manage with time. Now this investor is locked in for a greater amount of time while limiting any mobility.