Should you make ELSS tax-saving investment when markets are near all-time highs?

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September 03, 2021 5:04 PM

The stock prices have never moved in a linear fashion in the past and dips, corrections and market crashes are part of equity investing.

tax saving mutual funds called ELSSCurrently, the 1-year, 3-year 5-year average annualised growth of ELSS funds is nearly 54 per cent, 14 per cent and 14.25 per cent respectively.

There are a plethora of investment options for saving income tax under Section 80C. From PPF to 5-year bank fixed deposits to equity linked savings scheme (ELSS), each of them comes with their own unique features and attributes. One thing common to all is the lock-in period that comes along if you want to save tax on your investment. Of all the tax-savers, ELSS is the only one that has the lowest lock-in period of only three years. So, if you invest Rs 1 lakh ( under Section 80C, you can invest a maximum of up to Rs 1.5 lakh in a year) in ELSS, at the prevailing NAV, then after 3 years, you can withdraw the amount as per the NAV on the date of redemption.

But, should you consider investing in ELSS at the current market levels when the stock indices such as Sensex and Nifty 50 are at an all-time highs? The answer to that may not be a straightforward one unless one is into predicting the stock market levels. The simple answer is that equities tend to drift upwards over the long term and hence equity prices will move up from the current levels. However, there could be and there will be ups and down as equities are prone to volatility. The stock prices have never moved in a linear fashion in the past and dips, corrections and market crashes are part of equity investing.

At the time when the lock-in period ends, if the NAV of ELSS funds are lower than buying price, it’s better to wait another 1-2 years or even more time to redeem when the market bounces back. Some investors use ELSS to fund their retirement or a long term plan. Every investment made today in ELSS can work as an annuity for the future years.

Currently, the 1-year, 3-year 5-year average annualised growth of ELSS funds is nearly 54 per cent, 14 per cent and 14.25 per cent respectively. Over the 10-year period, the compounded annualised growth is nearly 15.5 per cent for the ELSS category.

While choosing ELSS do not merely look at their short term performance. Look at how the fund has performed over longer duration as against its peers and its own benchmark. The winners of today may not even be in the top 5 funds list, 3 to five years from now.

It will also be better to diversify your ELSS investments across 1-2 schemes as not all funds have similar sector allocation.This will bring in stock-wise and industry-wise diversification to your portfolio.

Also, important to keep note of is the allocation of ELSS schemes across market capitalisation. Some could be heavily invested in large cap while others may be inclined more towards mid-cap. Keep a healthy mix to further add to diversification.

The markets are at an all time highs but predicting the future could be futile. For a long term investor, the markets have mostly been rewarding. Rather than trying to time the market, the time spent in the market is the key. One may start SIP in ELSS funds but remember, each SIP installment will have a lock-in period of 3 years from the date of investment. Choose to go lump sum or through SIP but your horizon longer while investing in equity funds.

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