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Risk involved in various Tax Saving Investments

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1.      How much risk are you willing to take on the investment?

2.      For how long will you not need to use these funds? i.e. what lock in period is suitable for you?

3.      Do you want your returns to be tax free?

4.      Do you want the maturity values of your investments to be non taxable?

5.      Do you need liquidity?

 

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Best Performing Mutual Funds

    1. Largecap Funds:
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    3. Mid and SmallCap Funds
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    4. Small and MicroCap Funds
      1. DSP BlackRock MicroCap Fund
    5. Sector Funds
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    6. Gold Mutual Funds
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

S. No.

Factor

Criteria

1.

Risk and Returns

·         Fixed rate of return with more safety - NSC, PPF, Bank FD OR

·         Market return with more risk - ELSS or ULIP.

2.

Lock-in period

·         Range: Up to 15 years lock-in;

·         ELSS has the least lock-in period of 3 years, whereas PPF has the highest of 15 years;

·         Others fall in between

3.

How return are taxed

The most crucial part is to look at how the returns are taxed.

·         Only PPF and ELSS offer tax free returns; whereas

·         Interest on NSC, Post Office term deposits and bank FDs is taxable

4 (a)

Tax Treatment on Maturity

·         Usually products offer tax deduction on investment

·         Few offer tax exemption on returns at the time of maturity

·         The taxability on maturity reduces the effective return that an investment offers.

4 (b)

EEE or EET category

·         Exempt-Exempt-Exempt (EEE) tax status - tax benefits at the investment stage, the accrual (accumulation) stage and maturity stage - PPF, ELSS and Life Insurance

·         Exempt-Exempt-Tax (EET) tax status - tax benefits at the investment stage and the accrual (accumulation) stage and are taxed at the maturity stage - Bank FDs.

·         In the new Direct Tax Code, lot of investment products will shift from EEE to EET wherein these products will be taxed at the maturity stage

5.

Maximum Investment Limit

·         If a product has maximum investment limit in a year, a tax payer will not be able to claim entire tax benefits for any amount invested above the maximum limit;

·         PPF has maximum investment in a year of Rs. 70,000

·         In case of ELSS and ULIPs there is no maximum investment limit.

6.

Liquidity

·         Most tax saving investment products come with a lock-in period;

·         PPF allows partial withdrawal during the 15 years tenure of the investment.

·         Tax savings bank FD cannot be broken before maturity and also banks normally don't give loans against these FDs.

·         Traditional Life insurance policies and ULIPs allow partial withdrawals but only after completion of 3 years. Also, as an investor you can take loans against life insurance policies.

·         An investor can also take loan against NSC Certificates.

7.

Inflation protection

·         Returns from financial products should beat inflation;

·         Low fixed returns products are to be avoided by investors during periods of high inflation as they yield negative returns.

·         In the long run equities have consistently given higher inflation adjusted returns than returns given fixed return securities.

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