Thinking of investing in ELSS? Here are some traps you might want to avoid.

Mar 10, 2021

Two of the most important things we will do during our working lives are managing our money and saving tax. Yet, unless we understand how to navigate these tricky areas safely, we can often end up investing in the wrong products.

So, before you invest, let's take a look at one way to save tax and grow wealth - ELSS.

What is ELSS?

ELSS stands for Equity Linked Savings Scheme. It's a category of MF's that helps you increase your wealth and save tax under section 80© of the Income Tax Act.

Other features of ELSS include:

  • Tax benefit with a minimum lock-in of 3 years.
  • Deduction of up to 1.5lakhs from total income under section 80C.
  • Choice of investment depending on your need - Growth or Dividend.

While ELSS funds offer you many advantages like lower lock-in and 100% withdrawal at the end of the period, how do you know it's the right choice for you?

Find out by considering your...

  1. Risk Appetite - With a minimum of 65% of your investments made in volatile equity and equity-related securities market, your risk can be significant. If your risk profile is aggressive or moderate, ELSS schemes can be a good idea.
  2. Investment Objectives - Specifically designed to provide 80C deduction under the Income Tax Act and help reduce tax liability in a financial year, it is also an excellent idea for investors with tax liabilities who also want to enjoy capital growth.
  3. Investment Tenure - Simply put, this is the time you want to stay invested in the fund. We already know that ELSS has a mandatory lock-in period of three years to get the benefits under Section 80C. Long-term investors benefit the most from ELSS, so consider this option if you are looking to invest for at least the next 3 years.

What not to do!

While ELSS can look like a great way to grow your wealth, we should avoid these common missteps:

  1. Don't wait. Start investing when you begin working and are in your 20's. Doing it through SIP or STP will help you maximise your returns and help you pick the best possible options.
  2. Don't jump funds until you find out why your fund isn't performing well. Only when you think the fund is underperforming despite the market doing well should you move to another fund.
  3. Unless you need periodic income, stick to the growth option to increase your wealth.
  4. While it comes to returns, the first thing to consider is your investment style. If you are more conservative than risk-friendly, pick a scheme that matches you.
  5. Accumulating too many funds can be challenging to manage, leading to over-diversification and making it hard to manage your portfolio.

Ultimately, the most important thing to do before you invest is to make sure you compare various ELSS funds' performances and read the fine print before signing on the dotted line.