Investing can be very rewarding. It is a beautiful feeling when your hard-earned money generates returns. Investing can be an excellent way to create and manage wealth while utilising idle funds. Investments do carry varying levels of risk. Therefore, it is essential to make sound investment decisions.
Tax-saving mutual funds are one of the many investment options available to investors. Not only does this investment option help investors generate returns, but it also helps them save on tax money. These mutual funds are an excellent investment option for newer investors and salaried individuals looking to invest in equity while saving money on taxes. Here are some common mistakes that one should avoid while investing in these funds:
Not assessing your risk
ELSS funds invest in equity and equity-related instruments. Equity investments are high-risk investments. Before investing, any investor should assess their risk profile. Investing in a security that does not fit your profile may lead you to make hasty investment decisions. It is also vital to have a financial plan in place. A financial plan will help you set a quantifiable timeline to achieve those goals.
Concentrated portfolio
Many investors may keep adding different ELSS mutual funds to their portfolios. Although these funds have several benefits, adding multiple to your portfolio can lead to overexposure to one segment. It also makes it difficult for an investor to track the performance of various funds over a period. Investing in one or two different funds simultaneously is advised as it helps you benchmark the fund and evaluate its performance quickly.
Not opting for SIP
A systematic investment plan is ideal for investing. An investor can invest a small amount at regular intervals instead of investing in a lump sum. Investing a lumpsum amount increases the total risk taken at one point and doesn’t offer a better cost average. A SIP can help investors stay invested for longer, compound their returns, reduce risk, and offer a better cost price average. SIP is also flexible and can modify conveniently.
Choosing the dividend option
An investor can choose either the dividend or the growth option while investing in a tax-saver fund. The dividend option may give the investor a periodic payout from the generated returns. Although this may offer regular income to the investor, it reduces the accumulated profit. On the other hand, the growth option reinvests the returns that have been generated. This is great to compound and substantially increase potential returns.
Redeeming immediately after the lock-in
Investors often redeem their units immediately after the statutory lock-in period of three years. Investors have the option to stay invested for longer. Staying equity for a long period has proved to be rewarding for investors.
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