After the lock-in, ELSS investments should be en-cashed only when an important financial goal has arrived or there is a medical or other financial emergency in the family, says Anil Chopra – Group CEO & Director, Bajaj Capital.
Illustration: Uttam Ghosh/Rediff.com
Investments in equity funds must be done with a long-term horizon, which is, at least seven years and more; longer the period of holding the higher will be the extent of wealth creation.
If your goal is approaching in next two to three years, please avoid investing in equity mutual funds as there is a higher probability of your investments not yielding returns to match your expectations.
Equity Linked Savings Schemes, popularly known as ELSS, are a great tool to save tax as well as create tax-free wealth in the long run.
Primary purpose of every ELSS investment should be to achieve a future financial goal or to create long-term wealth for distant goals like retirement planning etc., and tax-saving should be an incidental benefit or a secondary objective.
ELSS is preferred to open-ended equity schemes because of two reasons, namely, tax saving and discipline of holding for longer period.
Maximum limit U/S 80C is currently fixed at Rs 1.5 lakh and ELSS should be a major part of it for young investors who are below 40 years of age.
For high salaried or high income individuals, it is advisable to invest in ELSS amounts in excess of Rs 1.5 lakh also.
Tax benefit will be limited to Section 80C limit of Rs 1.5 lakh but the overall returns will accrue on the total investments leading to formation of a big corpus in future.
Investments in ELSS must be made every year in different schemes and each year investment can be linked to one or more of the following common financial goals.
- Buying a house few years from now
- Higher education of children
- Children's marriage
- For comfortable life after retirement
Many investors make the mistake of en-cashing the ELSS investment as soon as it completes three years and sometimes they use the same amount to invest in fresh ELSS in order to claim tax benefit in that year.
However, it is not a prudent practice as your capital will not grow and achievement of future financial goals will be jeopardised.
Also, there is a possibility that after the expiry of three years, the returns may be negative or sub-par.
After the expiry of the lock-in period of three years, the investor should review the performance of the scheme and in case the scheme has performed lower than the benchmark then the investment amount may be shifted to another open-ended equity fund for better returns in future.
ELSS investments should be en-cashed only when an important financial goal has arrived or there is a medical or other financial emergency in the family.
Investors should keep in mind that after the initial lock-in period of three years their ELSS investment becomes open-ended and investors can withdraw it in lump sum or in parts.
There is no exit load as well as there is no incidence of tax.