Financial experts are of the opinion that the best way to save taxes is making an investment into ELSS funds. But do not be in the false assumption that putting your funds in ELSS would suffice. Take into consideration that you keep away from mistakes that many investors have gone on to face. More than anything else, as an investor you should be aware on why you are investing to save taxes. Yes ELSS mutual fund lock in period is there, but to invest in such funds there are some pointers you need to remember.
Do not start off late
This advice might come a bit late but give due consideration to this point. Not only for ELSS is it important but equally for all other tax saving instruments. In order to maximize returns it is better to follow a SIP. At the same time it does give you ample time to conduct a proper research on your investment. In case if you go on to choose the wrong ELSS you do not have an option of correcting it for the next 3 years. Do start off early as you have ample amount of time to research and decide which ELSS you need to invest.
A fund should not be judged on its short term performance
This policy is not applicable for all funds and particularly not related to ELSS. Do not commit the mistake of investing in funds which is based on a 6 month or a year horizon in mind. Any scheme that you invest needs to be a consistent performer for the last 3 years.
Do not focus on the returns only
Returns are important but when you are investing do not focus on the returns only. You need to figure out whether your investment philosophy matches your view or not. For example for a scheme that takes a lot of risk to be on top might not be that much appealing to a conservative investor. In this case the person would be much better to opt for a conservative type of scheme.
Avoid the dividend trap
A lot of investors succumb to the trap of dividend when they invest in ELSS schemes. Take into view the fact that the dividend is mostly paid from your own money. Yes they can be a lot risky, but they could be a lot rewarding. When you are about to choose a tax saving instrument like ELSS be sure about the lock in period along with the risks involved.
No point to redeem after the lock in period
Traditionally the lock in period for an ELSS is 3 years. What many investors do is that they pull out the money once the fund period expires. No need to take out the money if the fund keeps on performing well. When you are investing in ELSS keep a long term horizon in mind say around 5 to 7 years. This would provide potential to earn money in the long run.