It’s that time of the year again when we randomly invest in different 80C investments to save tax. But with increased awareness, investments in ELSS funds have increased. But there is a confusion that persists as to how many funds have to be included in the portfolio.
Investing in many ELSS funds is not diversification. In fact, it is over-diversification. So investing in how many funds is ideal? Experts say one or max 2 funds for the purpose of tax saving is enough. Anything more leads to over-diversification. Investing in too many funds can make portfolio management difficult. Over diversifying can lead to lower returns. In over-diversification, you end up investing in similar sectors and stocks and own almost half the stock market.
Don’t go by the lock-in period
ELSS funds usually have a lock-in period of 3 years. But it is advised to stay invested in these funds for a period of at least 7 years. This is because these funds invest in equities and staying invested for an entire business cycle (7 years) can reap maximum benefits.
Do a SIP instead of a lump sum
Invest in ELSS funds by way of SIP instead of lump sum investment. This is beneficial in two ways. One, you can stick to one or max two funds every year. And two, you can reap the benefits of SIP investing like averaging out the cost of investment.
Do not choose different funds for different years
People invest in multiple funds choosing one fund a year and end up having 5-6 ELSS funds in their portfolio. Instead, they can pick a fund based on the advice of an expert and stick to it. Review the performance of the invested fund yearly and move to another fund if the existing fund isn’t performing well. In case an investor has more than 2 ELSS funds in the portfolio then redeeming the least performing funds is the only option they are left with. If they continue to stay invested in more than 2 funds then the portfolio will be over-diversified leading to lower portfolio returns.