ELSS is one of the best tax saving schemes that has been giving great returns from last few decades. However, a majority of the people who invests in ELSS does not get a good return. There can be many reasons, but mainly they commit five common mistakes which I have listed below. Avoid these mistakes while investing in ELSS, and get a return better than any other tax saving scheme is guaranteed.
1. Do not invest lump sum in the last three months
As per AMFI data, more than 50 percent inflow in ELSS accounts takes place in the last three months of the financial year, almost half of which comes in the month of March alone. Lump sum investments may not always help. Rather, one should consider systematic investments in SIP. To get better returns, one must consider investing when the markets are low. Plan your investment wisely.
2. Deciding looking at the short term performances
Do not make a mistake that most of the investors do. Do not decide in which ELSS you should invest look at the past few months or 1 year’s performance. This should not be your criteria for choosing the best ELSS to invest on. Rather, look at the past 3 to 5 years performances to decide where to invest. Follow Valueresearch's website as they take into count many things including stability of the equities before rating them.
3. Are you biased towards Dividend based ELSS schemes?
We sometimes, looking at the dividend given, choose the ELSS schemes. We think, if a company offers more dividend, then our returns will be more. However, this is not always true. When a company pays a dividend, they are paying you a part of their profit which otherwise would have stayed invested. When they give you the money in the form of a dividend, the amount is no longer invested and you do not get any return out of it. You should rather see dividends as another way of profit booking.
So, the advice is: refrain yourself from dividend based ELSS if you are eyeing on a long term investment.
You may now think of investing in dividend reinvesting option. Don't. Let me tell you why. Every time your dividend is reinvested, the lock-in period of 3 years starts and this keeps happening every single time.
4. Smaller funds = Less Returns
If you think smaller funds never give high yields then you are wrong. If you look at the performance of ELSS in the last ten years, you will notice that the Invesco India Tax Plan has given the maximum benefit. Despite being Asset Under Management value as only 320 Crore INR, this plan has given the best return. However, not many people could get the benefit from this scheme as they refrained themselves from investing in smaller funds.
By now, you may have realized smaller funds can also give you better returns. So do your homework before investing.
5. Lock-in = Maturity
Lock-in period is not your maturity period. So, when the lock-in period is over, do not think of redeeming the amount. Keep investing. You will get profit when you eye on a longer term. For a shorter term, the return may not be as expected.