Common Mistakes when Investing in ELSS Funds

1. Investing Solely for ELSS Tax 
   A common misstep is treating ELSS purely as a tool for tax saving. While ELSS offers deductions of up to Rs 1.5 lakh under Section 80C in the old tax regime, it is fundamentally an equity mutual fund. Investing in ELSS solely for tax benefits without assessing one's risk appetite and financial goals can lead to misaligned expectations. ELSS funds are subject to market volatility and their value can fluctuate based on market conditions. However, the volatility should not be a concern if one has a long holding period. Over long term, the volatility compensates in terms of higher returns, outpacing inflation.
   It is advisable to assess the fund's investment strategy, portfolio composition, and how it fits into your long-term objectives. Tax saving should be a secondary benefit, not the primary reason for investment.
   
   
2. Ignoring the Three-Year Lock-in
   Each ELSS investment comes with a mandatory three-year lock-in period. This restriction applies to every instalment, even if you are investing via a Systematic Investment Plan (SIP). Many investors overlook this detail, leading to liquidity issues when funds are needed urgently.
   
   Thus, plan ELSS investments with your financial goals in mind. Consider SIPs to stagger your investments and align each tranche with future milestones. That said, ELSS is perhaps the only product under section 80C instruments which has the shortest lock in period.
   
   
3. Redeeming Immediately After Lock-in
   While ELSS funds become redeemable after three years, this doesn’t necessarily mean you should withdraw your investments. Redeeming without evaluating market conditions or future potential could limit your wealth creation prospects.
   
   Use the lock-in as a minimum investment horizon, not a fixed exit point. Re-evaluate your fund's performance and your financial goals before making withdrawal decisions.
   
   
4. Focusing Solely on Past Returns 
   Historical performance is often used as a benchmark for fund selection, but it does not guarantee future outcomes. Market dynamics, fund manager changes, and macroeconomic factors can all affect future returns.
   
   It is important to look beyond past returns. Evaluate metrics such as standard deviation (volatility), Sharpe ratio (risk-adjusted return), and information ratio, rolling returns, fund management style, to ascertain the fund’s long run performance. It is essential to diversify your ELSS investment into two or three funds with different underlying investment of portfolio management styles like growth, value, quality.
   
   
5. Avoiding Professional Advice
   Many investors depend on word-of-mouth when choosing ELSS funds, which may not always offer advice tailored to their financial situation.
   
   It’s advisable to consult a certified financial advisor who can help assess your tax obligations, financial goals, and risk profile to recommend ELSS investments that fit your overall plan. Engaging a certified financial advisor helps building a robust investment framework tailored to your specific needs.
   
   ELSS funds offer a disciplined approach to tax-saving and equity investing, but only when used wisely. Avoiding these common mistakes can help investors make better decisions, achieve financial goals more efficiently, and navigate the complexities of market-linked instruments.
   
   For investors seeking a thoughtfully managed ELSS offering, PGIM India Mutual Fund provides an ELSS Tax Saver Fund designed to help investors save tax under Section 80C, under the old tax regime, while investing in a diversified portfolio of equities. Individual investors who fall in the highest tax bracket can save up to Rs. 46,000* per year on taxes. Managed with a long-term, research-backed approach, investing in growth and quality stocks, the fund aims to align with investors’ evolving financial goals.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.