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Equity Linked Savings Schemes have recently become a popular choice among new investors. More so because ELSS funds ensure an investor is disciplined due to its mandatory lock-in period. The assured tax benefits over investment return up to a certain amount can be availed.
However, investors need to pay more attention to the fund's interworkings. Various financial objectives must be evaluated and aligned with your financial goals. This blog will highlight the top five mistakes you must avoid while investing in ELSS funds.
Five common mistakes of investing in ELSS funds
ELSS funds are the most effective investment plans to harness the market potential. In ELSS mutual funds, the growth of your capital comes hand in hand with the tax-saving ELSS mutual fund advantages.
Hence, as an investor, you must navigate the ELSS investment market and learn what critical errors not to make and how to avoid them.
Choosing the Wrong Fund Without Research
Not researching while choosing a mutual fund is one of the biggest mistakes you can make as an investor. Without analyzing and simply investing in the recommended funds is a critical misstep. Researching the available options in the investment market is like a compass for travellers. Ask yourself the following questions before investing:
a. What is the historical performance of the chosen mutual fund?
b. Its impact on your financial portfolio?
c. Does it align with your financial goal, and how experienced is your fund manager?
Carefully researching your mutual fund could help you analyze the following:
a. How it will perform
b. What Diversification it offers
c. How much you can optimize?
Neglecting Diversification
You must ensure to diversify your portfolio. Ideally, you must follow the golden rule of putting only some amount of money in a specific fund and spread it across multiple funds. The more diverse your portfolio is, the better the chances to have good returns and lesser risks.
An ELSS mutual fund works on the equity investment process. An investor must keep in mind that they should be able to buy equities and stocks across different sectors.
Investing in various sectors could act as a shield against market fluctuations. However, the meaning of diversification does not imply randomly diversifying your funds. It caters to strategically aligning everything.
Market Timing Errors
Amongst all the mistakes an investor could make, market timing errors are the most costly. A major reason behind this is the temptation to buy and sell funds based on short-term market fluctuations predictions.
Whereas for successfully investing in a mutual fund, an investor must have a long-term perspective. Hence, you cannot be driven by emotions or impulsive decisions. Rather, focus on the long-term gains.
Apart from that, the market timings determine the trading factor. However, you must focus on the compounding effect, accurately map the market timings, and avoid being driven by the volatile market.
Ignoring Tax Implications
ELSS mutual funds are popularly known for their tax benefits. Amidst such tax-benefit factors, you must recognize the tax-saving ELSS mutual funds’ implications.
The capital returns from the ELSS funds are qualified for tax deductions under Section 80C of the Income Tax Act up to a range of ₹ 1.5 lakh. Hence, it would be best not to fail to comprehend these benefits since it can lead to a major opportunity missed.
A critical mistake that investors make is getting impatient and tempted to exit the best ELSS fund. This is typically done to get better tax benefits. Hence, ignoring the tax implications and not staying invested could majorly impact your wealth accumulation.
Disregarding Costs and Fees
Lastly, a crucial aspect that most investors overlook while investing in the ELSS mutual fund is its costs and fees. These fees might seem insignificant initially. However, during the investment phase, they could impact your investment returns majorly.
These fees could be the expense ratios, exit load charges, and management fees. If you neglect these, it will affect the profitability of your investment capital returns.
Remember that a high expense ratio can impact your returns, especially when compounded over the long term.
As a smart investor, you must aim at minimizing the cost generated by the fund. Make it more favourable for long-term investment plans such as the ELSS funds.
Conclusion
In conclusion, investment policies are one such aspect of the financial world that requires a strategic approach. You need to consider its good and bad aspects carefully. By recognizing the possible mistakes, an individual can make better decisions about their money. They can avoid falling into critical mistakes and missed opportunities. Loss of such opportunities could reflect a substantial loss of benefits you can easily earn from the policy. This comprehensive analysis will prevent you from making mistakes and optimize your investment returns.
