ELSS investments heat up at year-end. Is it wise, or should you invest throughout the year?

Come year-end and investors clamour to save up in tax-saving avenues to claim deductions on their taxable income. Section 80C investments are popular as the section allows a deduction of up to Rs.1.5 lakhs. Among the different avenues eligible for Section 80C deduction, Equity Linked Saving Schemes (ELSS) are preferred by many. The reasons –

• Market-linked returns
• 3-year lock-in
• Equity investment
• Diversified portfolio

However, most investors choose ELSS schemes in the last few months of the financial year. Have a look at the numbers –

• From the financial year 2005 to 2014, 20% of ELSS investments happened in March.
• Since FY 2014, about 50% of investors have invested in the last quarter – January, February and March.

But is it wise? What about market timing?

Equity-Linked Savings Scheme (ELSS) 

ELSS schemes are equity-oriented mutual funds that invest at least 65% of their portfolio in equity or related securities. Being market-linked and equity-oriented, ELSS carry a volatility risk. As such, timing the market becomes important when investing in ELSS.

Timing the market means looking for the right time to invest in ELSS. The investment can prove rewarding if the market falls since you can get more units. You can gain as the portfolio grows when the market recovers and rises. Moreover, investing when the market is poised to grow is profitable since your portfolio will also grow and yield returns.

This timing the market becomes challenging when you resort to year-end investing to save taxes. As the financial year draws close, you don’t consider the market. You invest only to save taxes and might lose out on the returns.

Another disadvantage is the possibility of loss. If the market falls after investing, your investment will suffer.

Systematic investments, on the other hand, are quite beneficial. Here’s how –

• Rupee-cost averaging
  Rupee-cost averaging is the concept of averaging out the effective Net Asset Value (NAV) investing in ELSS schemes. As you continue investing throughout the year, you don’t mind the market movements. When the markets are falling, you buy more units; when the markets are rising, you buy fewer units. The overall NAV of the investment is averaged over the investment tenure, which helps reduce the investment risk.

• No need to time the market
  With year-long investments, you don’t have to time the market. You can keep investing regularly, like through Systematic Investment Plans (SIPs) and build up a corpus for your financial goals.

• Affordable investments
  ELSS investments can help you claim a deduction on investments up to Rs.1.5 lakhs. However, shelling out this considerable amount in a lump sum can prove challenging. Compared to this, you can save affordably throughout the year and aggregate the investment to Rs.1.5 lakhs and claim the deduction.

Related - Read how ELSS can help you attain your financial goals

The bottom line

ELSS investment is a good way of lowering your tax liability and saving up simultaneously. However, investing towards the year-end can prove counter-productive. So, regularize your investments through SIPs and invest in a systematic manner throughout the year rather than rushing into it. You can compare the different schemes and then invest in one that offers the most consistent returns.

Related - Know what are passive ELSS funds

Here's how to select the best ELSS fund