5 Common Mistakes while Choosing ELSS- equity linked saving schemes

Hi,
Have you heard about ELSS mutual fund?
These are famous among the mutual fund unvestors who want to save the income tax using section 80c  in the ITR forms, and at the same time want to invest their money into the equity market.

So using ELSS - equity linked saving schemes, one can do these two jobs at the same time.

There are various advantages -
1. tax saving using section 80c, good returns, short lock in period.

2. The invested amount, the maturity amount and the returns are all tax free. Note that other than PPF, ELSS is the only option that comes under tax free returns.

But this is also the riskiest option under 80c, so one must be very careful. So in this post we will discuss few mistakes that people often do and must be very careful with.

1. Most people, instead of doing the SIP, do the lump sum ELSS investments in the last quarter of the financial year, i.e. in the period of January to March.

Data shows that almost 50% of the ELSS investments are done in the lump sum amounts in the last three months, and up to 25% are done in the month of March alone.

The market can be at higher points in these months, and therefore it will become costly and therefore a mistake. Yet, price averaging could have nullified that.
They do it for saving their income taxes by generaring ELSS proofs, but at the same time they lose the benefits of SIP.

2. Investing in too many Funds.
Each year people do a new fund investment, and therefore they end up with too many funds. This causes over duversification, and it becomes clumsy to track so many funds.

3. Investing only for three years.
The lock in period of ELSS funds is as less as three years. As soon as this period gets over, people withdraw their funds even if the fund is in a loss.
This can be a big mistake, because the equity markets are volatile and one should never take a loss.

4. Choosing a Dividend option and not the Growth option.

Dividends are a good regular income option, but not a good option in the long run if we compare it with the growth option. The compound effect is more advantageous, and even when you choose the dividend reinvestment option, it is bad because a new lock in period starts for the dividend reinvested.

5. Focussing on the Short Term Past Returns.

While choosing the fund, one should not look only at the recent two-three previous years' returns, but five to seven years returns. Warrent Buffett looks at the previous 10 ten years returns of the equity stocks, and mutual funds are not so different.