THERE is an often-heard line from our investors: `Please suggest me an investment that gives high return and is low on risk'. Now, that is something as elusive as experiencing snowfall in peak summer.
The other aspect investors should be focusing on but often tend to neglect is how to make an investment tax efficient.
Everyone wants to save on tax, under Sec 80C, but still fail to find out the best investment vehicles for them. They talk of NSC, five year-plus bank FDs, PPF, equity-linked savings schemes and insurance plans in the same breath, even though each one is different in many ways.
Though NSC, PPF and bank FDs are all 100 per cent debt instruments, their tenures and returns vary. An NSC has a six-year tenure, FDs can have five years or more, PPF has a 15-year tenure. NSC gives 8 per cent returns , which is fully taxable. The post-tax returns would be just 5.53 per cent in the highest tax slab. Returns on bank FDs are more or less the same as post-tax returns.
PPF gives a much higher post-tax return at 8 per cent.
ELSS is completely tax-free after the lock-in period of three years. The returns are variable of course, but long-term returns in equity-oriented assets are expected to be in double digits.
Insurance is a different ball game. Here, returns are tax-free at maturity, but they depend on whether it is equity or debt-oriented scheme.
As part of financial planning, apart from tax savings in the year of investment (under Sec 80C), one needs to look at tax efficiency and post-tax returns over time.
Also, look at the fit of the product in a portfolio. For that, we look at post-tax returns, the asset class to which it belongs, the risk inherent in the investment, its tenure and liquidity before investing.
One product that has emerged as a good investment option in terms of good post-tax returns is a fixed maturity plan or FMP. One-year commercial paper and certificate of deposits, into which most FMPs of that duration invest, are giving about 9.2-9.3 per cent returns now. FMPs are eligible for indexation after a year at 20 per cent. Accordingly, most FMPs are marginally over one year duration. The post-tax yield, assuming an inflation factor of 7 per cent, is thus about 8.8%. This is an excellent return, not available on most other options in a pure debt category.
One should consider tax efficiency while making provisions for liquidity too.
Liquidity margin that one needs to maintain is typically three months' expenses.
This includes all loan repayments too.
While providing for liquidity, it is a good idea to give a thought as to how much of it will be in a bank account and how much elsewhere. In a savings account, the money will earn just 3.5 per cent return.
However, if it were committed to a money manager fund, it could earn 4.5-6 per cent. Money manager funds attract a dividend distribution tax at 14.16 per cent. The interest earned on a savings account is lower and will be subjected to the tax applicable as per one's tax slab.
Hence, investing in a money manager fund is better in terms of returns and also tax treatment. If one is more comfort able with keeping money in the bank, it should be kept in sweep in deposits, which earn more than a savings bank account.
Investing in physical gold has lots of negatives, such as ensuring purity, handling physical gold, storage risks and getting the right price when you sell. Also, physical gold comes under long-term capital gains regime only after three years. And it is subject to wealth tax. A gold ETF is very much like investing in gold but it does not require holding gold in the physical form. As it is in the form of a mutual fund unit, it is eligible for long term capital gains treatment after one year and there is no wealth tax on it.
In home loans, taking a joint loan allows a couple to individually claim up to Rs1,50,000 each of interest paid for deduction from salary income.
