Even after the government brought back the long term capital gain tax of 10% on ELSS, the inflows into equity funds via this tax saving scheme continue to rise year after year. The reason investors are able to live with this change is that they are well aware of the high risk-returns tradeoff that ELSS has to offer over the long haul. Anyone salaried individual you see these days has prioritized ELSS as their top tax saving tool. Why is that so? ELSS offers a dual benefit for tax exemption and long term capital appreciation.
Not just that, ELSS has the shortest lock-in period among other tax saving instruments that fall under Section 80C of the Indian Income Tax Act, 1961.
However, there are a few common errors that most novice investors make before/during/after starting their tax saving journey with ELSS. Do understand that your investments in ELSS should turn out to be fruitful for you and not a liability on your overall investment portfolio and hence, it is essential to make an informed investment decision. As young modern-day investors, it is important for everyone to know how to invest in ELSS online so that they can avoid the common mistakes related to ELSS fund investments.
Let us focus on the 5 common mistakes that everyone should avoid when investing in ELSS funds –
Redeeming your ELSS units after the lock-in period
A rookie mistake that all investors make is that they wait for the ELSS’s lock-in period to get over so that they can book profits and withdraw their investments. This is not at all necessary as the three year lock-in is just for the tax break. Remember that ELSS has the shortest lock-in as opposed to other tax saving instruments like PPF and bank FDs that have longer lock-in periods. If your investments in ELSS have churned some decent profits, it is advisable to remain invested as there are chances that your profits can grow over the long term. You can even use your ELSS investments for targeting your life’s ultimate financial goal.
Investing only for tax benefit
Some investors believe that because they have exhausted their Section 80C limits they will not be able to invest in ELSS. This is not true at all. Do remember that ELSS is an equity mutual fund scheme, and the three year lock-in period can actually help a new investor to inculcate the discipline of investing. Investors can approach ELSS as a long term wealth creation tool rather than just looking at it as a tax saver fund.
Investing only Rs 1.5 Lac
There is a common misconception among ELSS investors that they cannot invest any sum greater than Rs. 1.5 Lac every fiscal year in this tax saving instrument. But the fact is that one cannot claim tax exemption for amounts exceeding Rs. 1.5 Lacs under Section 80C. That does not confine one to investing only the said amount in ELSS funds. There is no upper limit on ELSS investments and investors can invest any sum that their risk appetite permits.
Making a last minute lump-sum investment
Most investors wait till the end of the tax season and end up making a bulk investment in ELSS. There is no need to do that as one can invest fixed sums periodically through the Systematic Investment Plan (SIP). Also, making a lump-sum investment may leave the individual with a cash crunch in the coming months. Hence it is better to opt for SIP over lump-sum.
Investing in multiple ELSS funds
Since you are not someone who has time to keep constant track of your ELSS investments, investing in multiple schemes will make the task even more tedious. Its better to stick to make 2 or 3 different ELSS schemes and avoid over diversifying.