Even as you save tax through an ELSS fund, find out the approach that will help optimise your returns

As a financial year draws to a close, people rush to make tax saving investments and the haste often results in bad decisions. Take the investments in tax-saving equity mutual funds. These are essentially equity products, so they should be treated differently from other Section 80C alternatives, such as the PPF and life insurance. If you are considering an ELSS fund, here are the things you should keep in mind.

START EARLY

Investors should start investing regularly through an SIP from the beginning of the financial year, spreading their investments over 12 months. When you are investing a lump sum in the scheme, the timing of entry will have a bearing on the returns. If you invest when the market is at a peak, you could end up with erosion of capital.

INVEST WITHIN LIMITS

Some investors put money across multiple ELSS funds at the same time. However, this will neither enhance the tax saving, nor will it lend diversification to the portfolio. Since an ELSS is a Section 80C investment, you can claim a maximum tax deduction of `1 lakh.

NO DIVIDEND REINVESTMENT

With ELSS, opt for the growth or dividend option, not the dividend reinvestment option. If you choose the reinvestment option, any dividend that the fund declares at any point will be reinvested in the scheme and the units will, in turn, come with a lock-in period of three ye a r s. Under dividend reinvestment, you run the risk of leaving some money stuck with the scheme, limiting your flexibility to take out the entire money at any time.

REDEEM GRADUALLY

Don't be in a hurry to redeem your investment after the three year lock-in period. Remember that if you have an SIP in an ELSS, you need to hold each instalment for three years to be able to redeem the money.