I’m about to invest 50,000 in ELSS funds for tax saving purposes since last four years and have found them very attractive. But this year the market looks quite overvalued. Should I avoid ELSS this year and invest in a safer option?
-Name withheld on request
ELSS funds are equity funds and take risk in the market. Though you have earned good returns in the past, it may not be possible in future. Analysts say that the equity market will remain in a narrow range and may also face a downside in the next few months. Choose low-risk options like PPF or NSC for this year’s tax planning.
Having said that, please note that equities are the best way to build wealth over the long term. Your PPF and NSC may not match the returns of ELSS funds in the long run. Also, your exposure to ELSS funds should be determined by your overall asset allocation. Do not invest more than what you are planning to invest in equities.
You need to change the way you do your tax planning. It seems that during the tax planning season that begins in January, you invest in ELSS funds in one go. Lump sum investment is not the best way to invest in equities. A better option is to start a monthly SIP so that you can get the benefit of Rs. instead of investing 50,000 in one go in ELSS, you should break it into monthly SIP 4000-5000.
While doing your tax planning, you should also consider opening an NPS account and investing in the scheme. You can claim additional tax deduction of 50,000 under section 80CCD(1b) by investing in NPS.
Raj Khosla is the Managing Director of MyMoneyMantra.com.
Questions and thoughts at mintmoney@livemint.com
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