Mistakes to Avoid While Investing in Tax Saving Funds

People who generate some sort of income have to pay taxes after their income level enters a particular slab. If one plans their taxes early on they might be able to reduce their tax outgo and even convert into investments which can prove to be beneficial in the long run.

Section 80C of the Indian Income Tax, 1961 is one of the most important sections in the IT Act. It has listed all the rules and upto Rs.1.5 Lakhs that can be claimed as tax deductible. The most popular instrument is the ELSS or Equity Linked Savings Scheme which is listed in the Section 80C for Investing. You can invest the entirety of the Rs.1.5 Lakh amount annually. ELSS schemes have a lock-in period of 3 years.

ELSS funds have tremendous benefits apart from being tailor-made for saving taxes, but here we discuss the mistakes to avoid for investing in tax saving funds.

Last Minute Investing

It has been more than often, that people post-pone their tax-planning until the last minute and when the financial year is about to end, rush to put that amount somewhere or even ELSS schemes as a knee-jerk reaction. Then you have to invest the entire amount as a lumpsum and then they miss out on the benefits that an SIP or Systematic Investment Planning offer. Since the entire has to be invested to save it from being taxed, some investors do feel a “Cash-crunch’ which kind of defeats the purpose of effective financial planning. SIPs offer a the benefit of ‘Rupee Cost Averaging’ and a certain amount goes from the account every month.

No Need To Exit After 3 Years

It’s a common misconception associated with Tax Saving ELSS funds that, one has to withdraw after 3 years. This is actually just the lock-in period during which money is multiplying. Once 3 years a done, you are free to withdraw if you wish to but if don’t need the money, it is better to stay invested. You money will keep on multiplying with the ‘Power of Compounding’ and you have the opportunity to earn great returns.

Avoid Investing In Multiple ELSS Funds

Most fund houses offer an ELSS schemes or multiple ELSS schemes so there are many ELSS mutual funds out there. For the sake of diversification, it does not mean you have to invest in multiple schemes since ELSS funds are diversified from within anyway. They have a great assemblage of companies and the fund managers do a great job identifying the right stocks and papers to make your investment worthwhile. Most investors are pursuing busy lives with burgeoning careers which makes keeping track of multiple ELSS investment difficult. When it comes to investing if ‘ Don’t put all your eggs in one basket’ is true so is the converse i.e. ‘Too many cooks spoilt the broth’. Find the 2-3 funds that suit your investment goal and stick with them.

Invest Through SIP

SIPs are a great investment tool, even if you have lumpsum amount which can be invested ofcourse, but it is always better to have a small chunk going toward investing. Regular and effective, it inculcates the terrific discipline of saving regularly which is actually the key to making great wealth too.

Risk Appetite

Lastly, the Risk appetite, this is crucial and ELSS is a Tax-saving scheme yet it is better to stay within the confines of your risk capacity. There are ELSS funds which cater to different risk appetites like Aggressive or moderate risk types but if your risk appetite is ‘Low’ then find the scheme that offers just that. We must remember the thumb-rule, we are primarily investing in ELSS to ‘Save Tax’ anything we do above that should be considered adventurous. ELSS funds should be part of a broader, more focused financial plan.

So, these are the most common mistakes most make while investing in Tax-saving i.e. ELSS mutual funds. We hope this might help you to navigate around it effectively and get great returns.