Is it safe to invest in ELSS for tax saving even when market is overvalued?

I have been investing about ₹50,000 in ELSS funds for tax saving purposes for the past four years and have found them very lucrative. But this year, the markets are looking very overvalued. Should I avoid ELSS and invest in some safer option this year?

-Name withheld on request

ELSS funds are equity funds and carry market risk. Though you have earned good returns in the past, the same may not be possible in future. Analysts are saying that the equity market will remain range-bound and could even decline over the next few months. For this year’s tax planning, go for less risky options such as the PPF or NSCs.

Having said that, please note that equity is the best way to create wealth over the long term. Your PPF and NSCs will not be able to match the returns of ELSS funds over the long term. At the same time, your exposure to ELSS funds should be determined by your overall asset allocation. Don’t invest more than what you plan to allocate to equities.

You need to change the way you do your tax planning. It seems you invest in ELSS funds at one go during the tax planning season that starts in January. Lump-sum investments are not the best way to invest in equities. A better option is to start monthly SIPs so that you get the advantage of rupee cost averaging. Instead of investing ₹50,000 in ELSS at one go, you should break that down into monthly SIPs of ₹4000-5000.

When doing your tax planning, you should also consider opening an NPS account and investing in the scheme. You can claim an additional tax deduction of ₹50,000 under Sec 80CCD(1b) by investing in the NPS.

-Raj Khosla is Managing Director at MyMoneyMantra.com. 
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