By Elda Christy

Ranjan Naik*, 26, likes to work out at the gym. He wants a toned body and knows exactly what to do to get it.

Ask him about investments and he shrugs his shoulders! But, to his credit, he has kept aside some money for tax-saving investments.

A research analyst for the last four years, Ranjan approached an agent referred to him by a friend. The agent suggested two Equity Linked Saving Schemes (ELSS) because along with tax-benefits he would also get quick market-linked returns.

This was around the time when the stock market was at an all-time high: 21,000 in January 2008.

Initially, he made a marginal profit. But gradually the market began to fall. So, did the value of his investments; he lost Rs 4,500. 

Ranjan's investment details:

Ignorance is not bliss
 

ELSS is an equity diversified mutual fund that invests across various sectors and companies. The only difference between ELSS and other regular mutual funds is that it has a three year lock-in period and offers tax benefits. You can opt to invest through Systematic Investment Planning (SIP) or with a lumpsum amount.

But here's the catch: equity products are risky and it is safer to enter the market with a long-term perspective. A short-term focus can be risky, as in the case of Ranjan.

He, now, wants to exit both funds. “Before the market can do more harm to my investments, I want to withdraw my money and invest in safer options, like a bank fixed deposit," he says.  

“Often, investors fail to understand the basic rules of the game and then fret over market fluctuations. Quite predictably, what follows next, is panic selling," says certified financial planner Pranav Muzumdar.

Ranjan's plan of action 

Should he withdraw his money? “It's not a good idea,” says Muzumdar. He elaborates that Ranjan cannot exit the funds even if he wants to because of the three-year lock-in period. 

“Ranjan should stay invested for at least three years. He should understand that equity could give returns if he holds on to it for a longer time. And since he is young he can build an appetite for risk and make the most of such investments,” advices Mazumdar.  

Smart advice for ELSS investments: 

• Don’t fall for everything your agent tells you. Do your homework; ask people who have already invested in a particular fund, read magazines, browse web sites, and make a sound decision, based on your research.
• Invest in existing funds that are performing well. The best judge is the fund’s past performance and the kind of returns it has yielded.
• Once you have zeroed in on the mutual fund of your choice, believe in its fundamentals and remain invested. The stock market is not a money-making machine; it needs time to give you returns.
• "Ideally, one should stay invested in equity for at least six to seven years, says Muzumdar. So, enter the market with a long-term perspective.
• You could invest through SIP to cushion market risks. This is because when you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share or per unit over time.
  
  This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.
• Mutual funds offer three options -- dividend, dividend reinvestment and growth. In the long-run, the ‘growth’ option can give you better returns. To know more about these options click here.  
  
• Avoid new fund offers, which are popularly known as NFOs. To know more on NFOs click here.
  
• Last but not the least, as Muzumdar points out, do not lose your cool or engage in panic selling due to market fluctuations.