Here’s How to Make the Most from Your Tax Saving Investment in Mutual Funds

ELSS investments, commonly known as tax-saving mutual funds, come with the dual benefit of wealth creation and tax saving. By investing primarily in equities, an ELSS investment earns higher returns than traditional tax-saving investments like fixed deposits, PPF, and NSC.

Everyone wants to make good returns from their investments. But people are not sure whether they have picked the right funds or whether their investment strategy would do the trick? Moreover, they are not sure whether they are investing enough to achieve their goals?

Save Tax with Mutual Funds

If you have similar questions and doubts, read on to know how you can make the most of your tax saving investment in mutual funds:

1. Pick the Right Fund

A tree, if planted in the wrong soil may not fetch the best fruits. Similarly, for your ELSS investment, choose funds comprising the stocks that match your risk-appetite. For instance, large-cap stocks may tend to perform stably as compared to mid-cap and small-cap stocks.

Investing blindly may affect your returns. Hence go for schemes that have performed consistently during different market cycles. Use key parameters like standard deviation, Sharpe ratio etc., to compare your shortlisted schemes.

2. Link Your ELSS Investment to Your Goals

Just like this saying, “A Goal without Plan is just a Wish”, your investment in ELSS mutual funds should be backed by a goal. Your goals could be of short-term, medium-term or long-term, but proper planning to achieve them is crucial.

For instance, if your child is aged seven and you have plans for him/her to pursue a master’s degree in Europe at the age of 22, you need to start investing for it now. Similarly, you can also plan for other goals such as a foreign trip, a dream car or a dream house using ELSS investment.

ELSS investments work best when you consider them for long-term. So, choose the level of exposure to equity, depending on the tenure.

3. SIP – The Best Way to Invest in ELSS Funds

If investing a lump sum amount at one go (in an equity fund) is not your choice, you can spread out your investment across the year by starting a SIP in ELSS.

SIP route allows you to invest a fixed sum every month. However, it does not mean that you stick to this amount throughout the tenure. When your income rises, so do your savings. So, increase your SIP amount likewise. This decision to increase your SIP amount can have positive effects on your long-term savings.

4. Don’t Panic

Behavioural biases often leave investors paranoid and in panic. Additionally, investors are guided by external cues like TV channels, newspapers, or simply by word of mouth.

It might be easier said than done but it’s essential that you have faith in your ELSS investment and stay calm. Fear can drive you to rid yourself of your equities. It’s better to stay rational during market lows and highs to minimize the risks of behavioural biases.

5. Stay Invested

With ELSS investments, patience does the trick. Your investment can grow and benefit from the effect of compounding and rupee cost averaging if you stay invested for the long term. And ELSS investments do this better as the lock-in period is for three years, ensuring that you stay invested.

6. Always Review Your Portfolio

Always keep track of your ELSS investment and make it a point to review your funds at least once every year. Remember that, reviewing only the performance of your investment scheme will not tell you anything. You must compare its performance with its benchmark to find out how it has fared in a particular period.

If the scheme has beaten the benchmark, you may continue with the scheme. If it is underperforming, try to find out the reasons for its underperformance. If you find compelling reasons, invest proceedings in a better scheme.

The Bottom Line:

These simple steps have facilitated many investors to achieve their goals. So, use these steps, not just for tax planning, but to fulfil your goals too!