HOW TO INVEST IN ELSS Funds

HOW NOT TO INVEST IN ELSS

Avoid these mistakes that investors make.

INVESTING A LUMP SUM AT THE END OF THE YEAR

SIPs are by far the best way to invest in stocks and equity funds. Though SIPs in equity funds have seen a robust increase, the simple logic is lost on ELSS investors. AMFI data shows that nearly 50% of the total inflows into the ELSS category happen in the last three months of the financial year. The month of March alone accounts for 22-25% of the total inflows. Instead of taking the safer and more convenient SIP route, taxpayers get caught up in the year-end rush and invest a lump sum in risky assets.

BASING YOUR CHOICE ON SHORT-TERM PERFORMANCE

The other big mistake is to look at the short term performance of the funds and go with the best performer. ELSS funds are equity schemes, and the stability of the returns is more important than the quantum of gain. Look at the 3-year and 5-year performance of the scheme before you make a choice. We have identified the best ELSS schemes based on the Value Research star ratings, which take into account several parameters, including the stability of returns and long-term risk-adjusted performance.

CHOOSING THE WRONG OPTION

Dividends from mutual funds are just another way of booking profits. The dividend you receive gets deducted from the NAV, so you don’t really gain anything. If you have invested in ELSS funds for the long term, don’t go for the dividend option. The dividend reinvestment option is even worse. Every time the fund gives out a dividend and reinvests the money into your account, the three-year lock in period starts all over again. In effect, you are locked in for perpetuity.

IGNORING SMALLER FUNDS

With an annualised return of 13.84%, the Invesco India Tax Plan is the best performing ELSS fund in the past 10 years. But very few investors have gained from it, because its AUM is only `320 crore. The terrific returns generated by this tiny fund has led us to include this scheme in our list of top ELSS funds. So, don’t base your choice on size but go by the performance.

REDEEMING AFTER LOCK-IN

Don’t treat your ELSS funds as a short-term investment. There is a difference between lock-in and maturity. NSCs and tax-saving fixed deposits mature in five years and therefore the money comes back to you after five years. ELSS funds have a three-year lock in period, but this doesn’t mean you should redeem the investment after three years. Look at ELSS funds as regular equity funds that should be held for the long term.

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