Investing in Equity Linked Saving Scheme (ELSS) remains a popular choice among Indian taxpayers, offering dual benefits of tax savings under Section 80C of the Income Tax (I-T) Act and the potential for long-term returns. However, despite its attractiveness, investors often falter due to various mistakes, ultimately diminishing their investment gains.
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While ELSS presents lucrative tax-saving opportunities coupled with the potential for wealth Tax savingsaccumulation, avoiding these common pitfalls is crucial for maximising returns and achieving long-term financial objectives. Investors must exercise diligence and seek professional guidance to make the most of their ELSS investments. Here are the 10 key pitfalls to steer clear of when investing in ELSS:
Solely Tax-Saving Focus
A prevalent misstep among investors is concentrating solely on tax-saving objectives when investing in ELSS. While tax benefits are indeed a significant perk, overlooking other crucial factors such as fund performance, manager track record, and investment style could jeopardise long-term returns.
Lack of Diversification
Failure to diversify investments is another common blunder. ELSS funds inherently carry market risks, necessitating diversification across multiple funds and asset classes like debt funds and fixed deposits to mitigate overall portfolio risks.
Ignoring Lock-in Period
The lock-in period of three years associated with ELSS investments often catches investors off guard. Neglecting this aspect without assessing short-term liquidity needs can result in financial constraints and missed opportunities.
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Overlooking Investment Style
Each ELSS fund comes with its unique investment style, ranging from value investing to growth or dividend investing. Ignoring this crucial aspect may lead to misalignment with investment objectives and increased risk exposure.
Failure to Monitor Performance
Regularly tracking the performance of ELSS funds is paramount for ensuring satisfactory returns. Neglecting this could result in missed opportunities to reallocate investments and optimise returns.
Relying Solely on Past Performance
Choosing ELSS funds solely based on past performance is a common pitfall. While historical data provides insights, it’s imperative to consider other factors like the fund manager’s expertise and portfolio composition for informed decision-making.
Disregarding Expense Ratio
The expense ratio significantly impacts returns, yet many investors overlook it. Opting for funds with lower expense ratios can potentially enhance long-term gains by minimising costs.
Underestimating Fund Manager’s Track Record
The track record of the fund manager plays a pivotal role in fund performance. Disregarding this aspect could lead to subpar returns. Opting for ELSS funds managed by experienced professionals is advisable.
Short-term Investment Horizon
ELSS investments are tailored for the long term. Investing without a sufficiently long horizon undermines the potential benefits and could lead to suboptimal returns.
Neglecting Professional Advice
The complexity of ELSS investments warrants professional guidance. Investors should seek the expertise of financial advisors to navigate through the investment landscape and make informed decisions aligned with their financial goals.
