Multiple options, conflicting advice and a deadline that’s fast approaching. Many taxpayers find themselves in this situation at the beginning of the year when they have to make tax-saving investments. If you have already zeroed in on ELSS as a part of your tax saving portfolio, here are some do’s and don’ts for you to follow:
1. Don’t invest in too many ELSS funds
A lot of investors follow this and make a mistake of buying a new fund every year or buying too many funds in the same year thinking that a large number of funds diversify their portfolio.
That’s a myth, because all it does is make the portfolio difficult to monitor.
Too many funds also leads to over-diversification where the portfolios of stocks of the various funds is not very different. The percentage allocation may differ slightly but the funds will essentially have the same basket of stocks. If you invest in 5-6 ELSS funds, your portfolio will not be very different than if you had invested in just 2-3 of those funds.
2. Choose growth over dividends
Investors often choose the dividend option while investing in ELSS. Unless you really need periodic income, don’t opt for the dividend option. Stick to growth option if you want to create wealth over long term.
3. Don’t just look at short term performance
One of the key features of equity investing is to hold on to your investments for a longer term to allow them to give you good returns. However, investors often get lured into selecting a current top performer fund over a consistently performing fund. It is not advisable to invest your money based on six-month or one-year returns. Some funds take a lot of risk to stay on top but this strategy is often not sustainable. Look for funds which have consistently performed over the last 5 years and choose an investment philosophy which matches your profile.
4. Treat it as a part of financial planning
When we talk about longer goals like children’s higher education, retirement or buying a house, it becomes necessary to invest in equities, because in the long term, only equity will help you to accumulate the corpus for your goal. Since, you need to be locked in for atleast 3 years with an ELSS fund, treat it as a part of your financial planning where you will also get the benefit of investing in diversified equity with tax saving.