Equity Linked Savings Scheme (ELSS) is one of the preferred options for investors to avail tax benefit under 80C. However, there are a few common mistakes which investors should avoid while investing in ELSS.
1. Do not invest in new ELSS every year: I have observed clients having at least 3-4 ELSS funds in their portfolio. An extreme case – a client had nearly 40 per cent of his total equity portfolio in 5 ELSS funds. Investors typically review latest 1 year performance and keep on adding new funds earning highest returns. This inevitably leads to duplication in the portfolio. The intent should be to optimally diversify the portfolio and not repeat too many funds of the same category. Even one ELSS fund is sufficient. Review and track the performance and if it consistently fails to beat the benchmark, then go for a new fund.
2. Do not invest in ELSS if not required: ELSS is not for those investors who(a) already have a decent exposure to equity mutual funds and (b) have their 80C taken care of easily by EPF and/or PPF contributions. Most ELSS funds invest about 50 per cent of their money in large cap stocks and the rest in mid and small caps. If you are already having large, mid and small cap funds in your portfolio, then you do not need ELSS. ELSS is for those investors who (a) do not have any or minuscule equity component in their portfolio, and (b) also need to utilise the full benefit of Rs.1.5 lakh deduction under 80C.
3. Do no exit after 3-year lock-in: After the lock-in period is over, many investors exit the ELSS fund. It is not mandatory. Instead, one should stay invested. Equity investments need a longer time horizon of at least 7-8 years to ride out the market volatility. Just like we avoid withdrawing from EPF and/or PPF meant for retirement, ELSS can be mapped to a long-term goal and the money can compound and grow over time till the actual time of requirement. If the purpose is defined, it provides much more clarity and confidence to stick to the investment decision irrespective of market movements.