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Equity-linked savings schemes (ELSS) is one of the most popular tax-saving investment options in India as it offers tax benefits of up to 1.5 lakh under section 80C of the Income Tax (IT) Act. You can invest in ELSS as a lump sum or as a systematic investment plan (SIP).

ELSS funds are typically instruments to save tax, however, they may also be beneficial to achieve your long-term financial objectives, such as retirement. By staying invested for longer, you can enjoy the compounding effect, which happens when your gains are reinvested to generate additional returns that will help your investment grow.

You can reap the benefits of investing in ELSS mutual funds if you avoid these common mistakes.

1. Exiting after 3 years:

ELSS comes with the shortest lock-in period of 3 years among the other tax-saving instruments. However, it is not advisable to pull out after the lock-in period ends. You should ideally stay invested for at least five years. “If the scheme you have invested in has been consistently delivering good returns and outperforming the benchmark; then you should not redeem even if the lock-in has ended. And, you should reinvest the entire accumulated amount in the same fund to get tax benefits for the year ahead,’’ explained Harshvardhan Roongta, Director of Roongta Securities.

2. Investing in too many ELSS Funds:

It is necessary to track the performance of your investments and by investing in too many ELSS funds it becomes difficult to monitor your portfolio. ELSS invest in different equities by default and therefore it is not necessary to invest in multiple ELSS for diversification.

3. Investing at the last moment:

The fact that ELSS investments are typically considered as a tax-saving option, most people invest at the eleventh hour to save on taxes. To get the best out of your investment, one must start early. Delaying your investment decision may result in choosing the wrong fund that will hardly give you any benefit.

4. Not opting for the SIP route:

The SIP approach may not only benefit investors from rupee cost averaging, but also help them develop the discipline of saving regularly. Hence, instead of going for a last-minute lump sum, you should try investing through SIP.

 5. Try not to go beyond your risk appetite:

ELSS is an effective way to save tax. However, investors should not let their ELSS investment diverge from their risk appetite and financial plan. ELSS may be a good vehicle for diversifying your portfolio, but being an equity-linked investment, it comes with some risks associated.