Many of us make a small mistake when it comes to investing in equity-linked saving scheme (ELSS), more popularly known as tax-saving mutual fund (MF) schemes: every year, we invest in a different ELSS scheme. These schemes allow tax deduction for an investment of up to 1 lakh under section 80C. After five years or so, we end up having a handful of ELSS in our portfolio, all serving the same purpose.
Why do you invest every year?
One of the reasons why some investors end up investing in a different ELSS every year is that they invest lump sum amounts. The logic of investing every year is that investor get tax deduction benefits every year, too. Financial planners say that investors’ behaviour, therefore, prevents them from investing in the same ELSS scheme every year. This is especially so if the investor is habituated to investing in ELSS schemes year after year over a long period of time, say five years or more. So instead of investing in the same scheme for all five years, the investor ends up investing in different ELSS schemes, periodically.
Invest SIP by SIP
One of the better ways to invest in an ELSS is through a systematic investment plan (SIP). Financial planners recommend a three-year SIP in an ELSS, whereby every month a fixed sum of money goes into your ELSS. This way, planners say, investors don’t have to bother to choose a new ELSS every year and the investment continues, automatically.
Note that an ELSS scheme comes with a lock-in of three years. Every SIP instalment gets locked in for three years and the lock-in starts once that particular instalment gets invested in. Say, you start a three-year SIP on 1 January 2013. Your last instalment will get invested in 1 December 2015. The lock-in of the last instalment (made in December 2015) will end only in December 2018. That shouldn’t matter if you do your due diligence and invest in a well-managed scheme. Equities are, after all, long-term investment vehicles; the probability of them making a loss goes down as the time horizon of investment goes up.
Top-up in SIP
Some fund houses offer a top-up facility in SIPs. Check if your fund house provides that. This is a useful feature that comes in handy if you wish to increase the investment amount of your SIP. If your fund house offers a top-up facility in your SIPs, you can straightaway increase the amount in your existing, ongoing SIPs, without having to start another SIP all over again. Alternatively, you can start another SIP in the same ELSS.
Remember, just one or two ELSS in your portfolio is more than enough. It’s always a good idea to keep investing in the same ELSS, every year, unless its performance has taken a turn for the worse or the fund management is botched up.
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