Investments in Equity Funds must be done with a long-term horizon. Definition of long-term may differ from individual to individual. However, in our opinion, long term is a minimum of 7 years, and the longer the period of holding, the higher will be the extent of wealth creation.

For instance, if your goal is approaching in the next 2 to 3 years, please avoid investing in Equity Mutual Funds as there is a higher probability of investments not yielding up to expectations. Equity Linked Saving Schemes, which are popularly known as ELSS, are a great tool to save tax in the year of investment as well as to 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 in the year of investment 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 a longer period. Maximum limit U/s 80-C 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 80-C of 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 ELSS schemes and each year investment can be linked to one or more of the following common financial goals: 

>Buying a house a 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 3 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 policy as your capital will not grow and achievement of future financial goals will be jeopardized. Also, there is a possibility that after the expiry of 3 years, the returns may be negative or sub-par.

After the expiry of the lock-in period of 3 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 3 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.

(Contributed by Anil Chopra, Group CEO & Director, Bajaj Capital)