Welcome to FundooMoney, your 24 X 7 buddy in all matters related to personal finance. As the tax-saving investment season comes back again, there would be many mutual funds and their advisors urging you to buy equity linked savings schemes (ELSS). How do you actually buy one that suits your needs? Here are some tips.
Recognise the higher risk Like other equity funds ELSS also invest your money in the stockmarkets. Naturally, all the risks associated with the stockmarkets are involved, be it the risk on your returns or the principal invested. So, remember that you can’t take high returns for granted. Neither can past returns have any bearing on future returns though they give you conviction while investing.
Be prepared for a 3-year lock-in Money invested in ELSS will be locked in for three years. In any case, equity investments should ideally be made for far longer horizons such as 8 years or more. So, look before you leap by checking the track record and other details such as investment philosophy.
Stay away from lure of dividends The best performing funds may not be great on the dividend declarations front. Don’t fall for this common marketing spiel on dividends.
Avoid too many ELSS Most ELSS end up investing in the same stocks. There is little point in having more than 1-2 of them. You can keep topping up in the same scheme in the subsequent years and move money away to other equity schemes if the fund performance lags peers and benchmarks after the 3-year lock-in period is over.
In the end, a quick recap. Before buying an ELSS plan you must: • Recognise the higher risk of ELSS. • Be prepared for a 3-year lock-in. • Stay away from lure of dividends. • Avoid too many ELSS.
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