Invest in Tax Saving Mutual Funds? This List of Dos and Don’ts You Must Follow

Invest in Tax Saving Mutual Funds

While there are now many different options to save tax, increasing number of people now prefer tax saving funds due to the wide range of benefits they offer. But as a new investor, there are a few very important dos and don’ts that you should know.

While FDs, RDs, NSCs, and PFs have been a go-to option for working professionals in India to save taxes, a major shift in the investing ideology has been witnessed in the past few years. Increasing number of people have now started investing in ELSS funds which are eligible for a tax deduction of up to Rs. 1.5 lakhs as per Section 80C of the IT Act.

These are diversified equity funds which don’t just allow you to save taxes but can also generate handsome returns. But while ELSS sure looks promising, there are a few important dos and don’ts that every new investor should know about.

Some Dos

  1. Do Invest at the Beginning of the Financial Year

Majority of the people invest in ELSS funds when the deadline for filing the investment proof is only a few days or weeks away. While this might help you save taxes, this is not quite a sound investment strategy.

It could not only result in a cash crunch as you’ll probably invest a lump sum amount, but you might also end up selecting a scheme which is not in line with your investment ideology. Thus, it is better to thoroughly plan the investment and invest at the beginning of the financial year.

  1. Do Remain Invested Even after the Lock-in Period is Over

ELSS funds have a lock-in period of 3-years which is shorter than other popular tax saving instruments. However, a lot of investors redeem the units as soon as this lock-in period is over.

You should know that ELSS funds are essentially equity funds which have a reputation of generating better returns the longer you remain invested. So, if you are sure that you don’t need the money at the end of the lock-in period, it is better to stay invested.

  1. Do Prefer the Growth Option for Long-term Wealth Generation

With ELSS funds, you get growth and dividend option when you invest. A large number of investors select the dividend option but do not know that the dividends distributed are adjusted from the NAV of the fund and not some form of additional income.

In the long run, this can severely affect your returns. So, if your goal is long-term wealth generation, it is better to stick to the growth option.

Important Don’ts

  1. Do Not Just Go with the Top Performer

Many of the new investors just end up selecting a scheme solely based on its recent performance. They fail to consider the fact that it is not necessary for any fund to continue delivering similar returns in the future too.

Rather than focusing on the recent performance of a fund, check its consistency on a long-term basis to make a better decision.

  1. Do Not Miss Going Through the Portfolio of the Fund

It is wrong to assume that every ELSS fund has a similar portfolio. ELSS funds are diversified equity funds due to which the fund managers get a lot of leeway with regards to the investments they make.

For instance, an ELSS fund might have most of its money invested in large-cap companies while another might have mostly small caps in the portfolio. Thus, it is vital to go through the portfolio of the fund and match it with your investment objective to make the right decision.

  1. Do Not Invest in Multiple ELSS Funds

A lot of investors pick a new ELSS fund every year to save taxes. Over a period of 5-8 years, they end up having investments in multiple funds.

Having more than 2-3 tax saving mutual funds in your portfolio will only make it difficult for you to track your investment. If you want to invest more, prefer the same funds in which you’re already invested rather than choosing a new fund every time.

The right way to invest in ELSS funds is through detailed planning as soon as a new financial year begins. Avoid postponing tax-saving investment for the last month and keep the points mentioned above in mind to pick the right scheme, save taxes, and generate handsome returns.

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