Mistakes to Avoid While Investing in Tax Saving Mutual Funds=—–74
Are you looking to save on taxes while growing your wealth? Tax-saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), have emerged as a popular choice among investors, offering dual benefits.
ELSS mutual funds are one of the most lucrative investment instruments under the old tax regime that come with a 3-year lock-in period and make you eligible for a deduction. t2 corporation income tax return Under Section 80C of the Income Tax Act, such investments allow you to claim a deduction of up to INR 1.50 lakhs from the gross income in a financial year.
In this guide, we have discussed five common mistakes investors make while putting their funds in ELSS mutual funds.
5 Mistakes to Avoid When You Invest in ELSS Mutual Funds
When it comes to tax planning, ELSS funds are one of the best investment avenues. However, investors need to be careful about the following mistakes when they plan to invest in mutual funds of this category.
- Redeeming ELSS investments after 3 years
One of the prime benefits of tax-saving mutual funds is that they come with the shortest lock-in period. However, investors feel tempted to redeem their funds just after 3 years or tend to withdraw the amount through SWPs.
This potentially deprives them of the most rewarding benefit of equity investing – the power of compounding.
Remember, the 3-year lock-in is meant only for the tax benefit. So, focus on the long term.
- Restricting investments to the Section 80C limit
Many investors make the mistake of restricting their annual investments to the INR 1.5 lakh limit under Section 80C of the Income Tax Act. Considering your SIP, investing INR 12,500 per month can help you save this tax.
However, there’s no upper capping on ELSS fund investments, and you can go beyond this limit if you have the financial capacity for higher returns. Besides being a tax-saving instrument, ELSS also helps in achieving your long-term financial goals.
- Ignoring Fund Performance
Investors often end up choosing an ELSS mutual fund based on its past performance. This is a common error since its historical record simply gives you an idea of its performance. However, it doesn’t guarantee impressive returns in the future.
Factors investors must scrutinize include:
- The fund manager’s track record
- Expense ratio
- Investment strategy
- Consistency of performance in different market cycles
Also, compare the performance of the funds to its peers and benchmark to get a clear picture.
- Overlooking Expense Ratios
The net returns from your ELSS funds are affected by the expense ratio. With a higher expense ratio, fees and charges will eat up a larger part of your returns, reducing the overall gains over the long term.
We highly recommend comparing the expense ratios of different ELSS funds and choosing one of the top-performing ones with the lowest ratios.
- Failing to Diversify Investments
While investing in ELSS mutual funds can save substantial amounts of tax annually, make sure not to focus only on this tax-saving instrument. ELSS funds are exposed to equities, which involve the risk of market volatility.
Make sure to diversify your investments across other classes of assets to manage your risk better. This will balance your portfolio and mitigate market risks significantly.
The Bottom Line
As an investor, you can consider investing in one of the top ELSS funds to save tax. However, do not repeat the mistakes we covered in this article. This will help you make the most of these tax-saving instruments. With an organized investment strategy and informed decisions, you can maximize the benefits of ELSS funds.
