Should you invest in ELSS to save tax when markets approach historic highs?

Stock prices have never moved linearly in the past and stock market declines, corrections and crashes are part of investing in stocks.

There is a plethora of investment options for saving income tax under Section 80C. From PPF to 5-year bank deposits to share-linked savings plans (ELSS), each has its own characteristics and attributes. One thing common to all is the lock-in period that follows if you want to save tax on your investment. Of all the tax savers, ELSS is the only one with the lowest lock-up period of just three years. So if you invest Rs 1 lakh (under section 80C you can invest up to Rs 1.5 lakh per year) in ELSS, at the current net asset value, then after 3 years you can withdraw the amount according to the net asset value. on the date of redemption.

But, should you consider investing in ELSS at current market levels when stock indexes such as Sensex and Nifty 50 are at all-time highs? The answer to this question may not be straightforward, unless one predicts stock market levels. The simple answer is that stocks tend to drift higher over the long term and as a result stock prices will rise from current levels. However, there could be and there will be highs and lows as stocks are prone to volatility. Stock prices have never moved linearly in the past and stock market declines, corrections and crashes are part of investing in stocks.

At the end of the lock-in period, if the net asset value of ELSS funds is lower than the purchase price, it is best to wait another 1 to 2 years or even longer to redeem when the market rebounds. Some investors use ELSS to fund their retirement or long term plan. Every investment made today in ELSS may work as an annuity for years to come.

Currently, the 1-year, 3-year, 5-year average annualized growth of ELSS funds is nearly 54%, 14% and 14.25% respectively. Over the 10-year period, the compound annualized growth is nearly 15.5% for the ELSS category.

When choosing ELSS, don’t just look at their short-term performance. See how the fund has performed over a longer period of time relative to its peers and its own benchmark. Today’s winners might not even make the Top 5 list for 3-5 years.

It will also be better to diversify your ELSS investments over 1 to 2 programs, as not all funds have a similar sector allocation. This will bring equity and industry diversification to your portfolio.

It is also important to note the distribution of ELSS plans by market capitalization. Some could be heavily invested in large caps while others could be more geared towards mid caps. Keep a healthy mixture to add further diversification.

The markets are at record highs, but predicting the future could be futile. For a long-term investor, the markets have mostly been remunerative. Rather than trying to time the market, time spent in the market is key. One can start SIP in ELSS funds, but remember that each SIP payment will have a blocking period of 3 years from the date of investment. Choose to opt for a lump sum or via SIP, but your horizon is longer while investing in equity funds.

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Dorothy H. Lewis