It’s the fag end of the financial year and my school friend is calling me for the fifth time. Often in haste, he calls me every year in the month of March. “Hi, can you quickly tell me which ELSS to invest this time to save on taxes?”
ELSS is one of the most popular instruments for saving on taxes. With its impeccable track record of beating inflation hands down to its lesser lock-in period (of three years), ELSS as a savings instrument has scored over PPF, Bank fixed deposits and other tax-saving instruments. However, investors need to guard themselves against some common mistakes committed while investing into ELSS.
Here are the five common mistakes that investors make:
- Lump sum investing: Investing in lump sum at the last month of the financial year – like my friend - might not be the best way. Rupee cost averaging through a SIP (Systematic Investment Plan) ensures you average out your unit cost through the ups and downs of the market. If you plan to invest Rs 1.5 lakh into ELSS, SIP it every month for Rs 12,500.
- Ignoring investing style: This is perhaps ignored by most investors. Unlike other equity schemes, ELSS doesn’t mention its market cap orientation. So, in the market, there are schemes that invest significantly into midcaps, while others stick to large caps or a combination. It’s important to know how the returns are being generated and that’s where a scan of their portfolio will help. Message: Don’t compare apples with oranges.
- Being Trigger-happy: Many funds underperform for a year or so but make a strong comeback to top the return charts over a three to five year period. It’s important that investors don’t panic and sell at first instance of underperformance. Why so? Many a time, investment calls – says betting on themes like consumption or cyclical – takes time. But when the market takes cognizance and its stocks rally, it more than compensates for its temporary underperformance. So, stay invested for the long-term.
- Loving large: The asset size of a fund can be large for many reasons. If it is among the best performing, more and more investors invest into it making it bigger in the process. And also as its NAV appreciate, its size increases. Moreover, big-sized funds give comfort to its fund managers to manage the fund without worries of redemption by some big ticket investors. However, becoming too large has its issues. There are instances where a midcap fund has closed for further subscription due to lack of investment opportunities. A Very large ELSS fund in turn could essentially become a large cap fund. This in turn could mean losing out on midcap opportunities.
- Concentrated bets:
If an ELSS is a super-performer, go ahead and invest into it. But, that should not be the only one. What’s the guarantee that the fund manager will remain the top performer two years down the line? Ideally, take a fresh look at the ELSS of choice every year and expand your basket of ELSS.
To get started, from April 1st, ensure you invest only through SIPs. Happy Investing.