ELSS Fund Guide: Mistakes To Avoid While Investing In Tax Saving Mutual Funds

Karan Batra, Chief Product Officer, MarketsMojo

Do not invest just to save tax on your investment. Like all fund categories, there are various funds with different track records, investment styles etc. Choose ELSS funds that have shown consistent performance and have a strong portfolio, tax savings being an added advantage.

Gautam Kalia, SVP and Principal Super Investor at Sharekhan by BNP Paribas

ELSS is not just for tax saving. You are investing in Equity Mutual Funds. The objective of these funds is to generate capital appreciation over the long term and hence these funds should be viewed as such. If you invest only for tax benefits then you are missing the forest for the trees. Everyone scrambles at the last moment to invest in ELSS to save tax. SIP in ELSS is also a good option as it gives you the benefit of value averaging (as most SIPs do).

Mr. Arun Kumar, VP & Head of Research, FundsIndia

Usually many of us shortlist funds based on their 3 year and 5 year returns and choose the one with the highest returns. This method of choosing funds based only on their past returns usually does not work well in the long run.

This is because equity funds go through cycles. Different investment styles, market cap segments, sectors and geographies perform well at different times. Because of this, basing fund selection solely on the basis of returns does not work in the long run. While past performance is a useful metric for evaluating a fund, it can never be the only one.

Ideally, you should look at a number of quantitative and qualitative factors such as:

1. Consistency in the underlying investment strategy and philosophy over time.

2. Consistency in performance over the long run (percentage the fund has outperformed the benchmark based on 5Y and 3Y rolling returns in the last 10-15 years)

3. Track record of performance across market cycles

4. Risk – Maximum drawdown, downside capture ratio, drawdown limit during bear markets etc.

5. Concentration Risk

6. Portfolio Turnover

7. Potential size constraints (if the fund size becomes large)

8. Fund Manager Track Record and Experience

9. Fund Manager Communication

10. AMC Pedigree

11. Expense Ratio

Ajay Agarwal, Associate Partner, Alpha Capital

Equity Linked Savings Scheme (ELSS) is a type of mutual fund scheme that predominantly invests in equity and offers tax benefits to investors under Section 80C of the Income Tax Act. While ELSS can be a good investment option for those looking to save tax and earn good returns over the long term, it is important to avoid the following mistakes:

risk: An investor needs to understand that ELSS ultimately invests his money in equity. Equity is ultimately a risky asset class, which can be volatile in the short term. While investing in equity it is important to understand the risks involved and be prepared to hold your investments for a long period of time to reap its benefits. Investors who are risk averse or very senior citizens should opt for other more stable options like PPF.

Diversification: 80c has to be invested every year. Not diversifying your portfolio and investing in the same ELSS scheme every year can lead to concentration risk. It is important to diversify and invest in various ELSS schemes. One can also opt for multiple ELSS schemes in a single financial year

market timing: Timing of entry and exit in the market can be a big mistake. Instead it is important to have a disciplined approach and stay invested for the long term. We suggest investing in SIP in the month of March instead of making one big investment at the last moment.

Supervision: Investors usually do not bother to monitor investments with Lockin. While ELSS is a long term investment, it is important to monitor it regularly.

expense ratio: Expenses can affect your returns in the long run. Expense ratio is important to consider while choosing an ELSS scheme for yourself

Overall, it is important to do your research and understand the risks involved while investing in ELSS. Consulting a financial planner can be helpful.

Ishkaran Chhabra, Founding Partner – Centricity Wealth

Under the mutual fund investment category, Equity-Linked Savings Scheme (ELSS) is a popular tax-saving investment option. However, not all investors are aware of the drawbacks of investing in ELSS in a wrong way or haphazardly.

These are the common mistakes while investing in ELSS-

Investing to reduce tax.

Do extensive research and invest in funds that are performing well to enjoy better long-term returns. If you do not want to take a lot of risk then consider investing in large cap funds. Also, invest early and be proactive in your investment journey to become well versed in the market while beating inflation.

Last minute lump sum investment at the end of the financial year

Investing lumpsum in ELSS funds can be a bad idea. Since ELSS are equity investments, market conditions at the time of your lump sum investment will have a significant impact on your returns. Instead, consider reducing your overall risk by making smaller investments throughout the financial year.

Waiting for a better time to invest in the market.

No one can predict the market. Any seasoned investor will tell you that they have seen the highest highs and the lowest lows. To be safe, do some research and invest in top performing funds, especially if you are investing for the first time. Invest actively to become familiar with the market.

Selecting the scheme based on the current performance.

Since ELSS funds are suitable for long-term investment goals, the performance of a fund cannot be judged by its current 5-star rating. While there is no harm in choosing such a fund, the best way to be safe is to evaluate the fund’s track record, where its assets are invested, the process behind its consistent performance, etc.

Ignore the fund category.

It is important to choose a fund category before investing in it. Asset management firms offer ELSS mutual funds in three categories: small, mid and large-cap funds. The funds you choose are determined by the amount of risk you are willing to take with your investments.

Finally, your ELSS does more than just reduce your tax burden. It should also meet two additional criteria: your risk tolerance and financial plan. Invest wisely and judiciously in ELSS to maximize your tax savings and also get higher returns on your investment.

Divam Sharma, Founder, Green Portfolio, SEBI Registered Portfolio Management Service Provider

ELSS is an effective way to save tax by investing in high growth equity assets. Also, given that there is a lock-in of 3 years, this product offers investors higher returns than a long-term commitment.

1. Investors should always stagger their investments in equity. This should be done throughout the year in SIP mode and not in lumpsum mode at the end of the year.

2. Redeeming ELSS immediately after lock-in can affect the return on investment. Exits should also be planned considering overall market conditions, as market cycles, in times of volatile markets, can result in short term drawdowns on your investments and if you postpone your exit at such times, your actual The returns can be much higher.

3. If you are investing money in equity, compounding benefits are available when the money remains invested for a long period. If you choose the IDCW option, the reinvestment benefits are not available and also your withdrawal is taxed at your tax slab.

4. Excessive diversification in multiple ELSS schemes should be avoided

5. Historical returns should not be the only criterion for choosing your ELSS, you should evaluate several other parameters like category, investment philosophy, AMC, fund manager profile, expense ratio, leverage ratio before investing.

6. Investors should not invest in ELSS only for the purpose of saving tax. They should understand the different asset classes, risks associated with ELSS investments, lock-in, returns, etc. before investing.

The views and recommendations given above are those of individual analysts or broking companies and not of Mint.