Is it the best time to invest in ELSS?

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Even if you are a seasoned investor with a profound understanding of the stock market, anticipating market fluctuations can be tricky. If only there were a crystal ball dedicated to stock market predictions!

Until the time such an invention arrives, we can only make informed decisions when it comes to investment timings. ELSS funds are one such investment avenue whose demand spikes at a particular time of the financial year.

Thesemutual funds are a popular tax-saving instrument. Therefore, many investors lock in their money in ELSS schemes at the end of the financial year. But is this a wise strategy?

Read to know when it is a good time to invest in ELSS funds.

When should you invest in ELSS funds?

Although the government has re-introduced long-term capital gains tax in ELSS funds, you can still claim deductions up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Hence, most investors sign up for ELSS investments before the end of the financial year when investment proofs have to be submitted.

In case you haven’t planned your taxes and want to save taxes, you can invest in ELSS funds based on a sound investment strategy. The investment should suit your goals, investment horizon and risk preferences.

Studies have shown that timing the market is next to impossible. Therefore, you should focus more on whether the investment is appropriate for you in the long-run rather than tracking market conditions.

The right way

The rewards of ELSS Investments are maximized in the long run. Consider a long-term commitment before investing in an ELSS scheme. These include:

  • Whether you have sufficient funds to invest
  • If you are comfortable with the high-risks typical of equity investments
  • The patience to stay invested in the long run
  • Whether you have funds at your disposal for emergencies so you do not have to break the investment early
  • The amount of money you can save on taxes by investing in tax-saving products

If you have analyzed these factors, the best time to invest in ELSS schemes is at the beginning of the financial year through SIPs. Shelving your investment for the end of the tax-saving season may not be a wise move. For instance, you may not have a lump sum at your disposal and could miss out on the tax-saving bus altogether. Also, you may be at a disadvantage if you invest a lump sum when the markets are high.

Being equity-driven, ELSS investments are prone to volatility in the short run. With monthly SIPs, you can invest at regular intervals, irrespective of market fluctuations. You can also get the advantage of rupee cost averaging through SIPs. This means when the markets are going through a slump, you can buy more ELSS fund units for the same investment value. When you sell those units during market highs, the cost per unit decreases and the profitability increases.

Conclusion: 

To put it in a nutshell, do not worry about market conditions when making long-term investments in tax-saving mutual fund schemes. However, be sure the investments are aligned with your long-term financial goals. The tax benefits could be an added perk.