‘If you always do what you’ve always done, you’ll always get what you’ve always got.’ - Anonymous
Most of us vow to do it early, but end up doing it in a hurry. Now is the time to start your tax savings investments. You can also use the ‘Contrarian Style’.
Asset allocation
While using tax saving investments, look at the overall asset allocation, since managing risk is the key to sustaining long term wealth creation. Tax saving avenues may restrict you to the available asset classes. While planning asset allocation, diversify across complementary avenues so that risks are managed better.
A contrarian needs to study various asset cycles and accordingly choose the investment avenue where the trend is likely to change. For example, when interest rates are expected to fall, invest in a bank fixed deposit of about 7-10 years instead of just a 5-year deposit.
To invest in equity or not?
Most of us who have invested in equity linked saving scheme (ELSS) funds last year are likely to see upto 60% fall in NAVs depending on when one invested. This might prompt us to look at lower risk avenues and be tempted to invest all the money into the ‘good old’ bank fixed deposit. However, keep in mind that interest bearing investments are not very tax efficient. A 10% pre-tax return could result in a post-tax return of only 6.6% at the highest tax slab. In the long term, equities provide among the best return among asset classes. If one analyses past Sensex data, from its inception, the risk level falls considerably in the long term. The risk (loss periods) is much lower as one approaches 3 to 5 years’ horizon. Over 15 years, there is not a single instance of loss.
A study of large market falls in the past (falls between 39-56%) shows that a three year horizon gave returns of 21%- 61% on a compounded basis. This is the minimum lock-inperiod required of the ELSS fund.
Available Options:
The summary of tax saving investment avenues under Section 80C:
Recommendation
Prudently diversify across debt and equity instruments. Since markets have fallen substantially, it is a good idea to use equity linked avenues like the ELSS and ULIP. Keep in mind your needs, so that you also achieve your financial objectives. Evaluate the life cover you need, to cover the monthly family expenses, needs and home loans, so as to secure your family. Traditional insurance can be used for conservative needs like children’s education. Do not miss out the tax saving for medical insurance. While using debt avenues, prefer tax efficient ones like PPF.
It is that time of the year again, when you do your tax saving investments; don’t get overwhelmed with the sentiment prevailing in the market. On the contrary, it is possible to take advantage of it to maximise returns.
‘Making your money work for you’ is possible even when you invest for tax saving — you increase take home plus earn returns from the investment. Don’t invest only to the extent of tax savings — go beyond it, if your needs are such.
Most of us vow to do it early, but end up doing it in a hurry. Now is the time to start your tax savings investments. You can also use the ‘Contrarian Style’.
Asset allocation
While using tax saving investments, look at the overall asset allocation, since managing risk is the key to sustaining long term wealth creation. Tax saving avenues may restrict you to the available asset classes. While planning asset allocation, diversify across complementary avenues so that risks are managed better.
A contrarian needs to study various asset cycles and accordingly choose the investment avenue where the trend is likely to change. For example, when interest rates are expected to fall, invest in a bank fixed deposit of about 7-10 years instead of just a 5-year deposit.
To invest in equity or not?
Most of us who have invested in equity linked saving scheme (ELSS) funds last year are likely to see upto 60% fall in NAVs depending on when one invested. This might prompt us to look at lower risk avenues and be tempted to invest all the money into the ‘good old’ bank fixed deposit. However, keep in mind that interest bearing investments are not very tax efficient. A 10% pre-tax return could result in a post-tax return of only 6.6% at the highest tax slab. In the long term, equities provide among the best return among asset classes. If one analyses past Sensex data, from its inception, the risk level falls considerably in the long term. The risk (loss periods) is much lower as one approaches 3 to 5 years’ horizon. Over 15 years, there is not a single instance of loss.
A study of large market falls in the past (falls between 39-56%) shows that a three year horizon gave returns of 21%- 61% on a compounded basis. This is the minimum lock-inperiod required of the ELSS fund.
Available Options:
The summary of tax saving investment avenues under Section 80C:
Recommendation
Prudently diversify across debt and equity instruments. Since markets have fallen substantially, it is a good idea to use equity linked avenues like the ELSS and ULIP. Keep in mind your needs, so that you also achieve your financial objectives. Evaluate the life cover you need, to cover the monthly family expenses, needs and home loans, so as to secure your family. Traditional insurance can be used for conservative needs like children’s education. Do not miss out the tax saving for medical insurance. While using debt avenues, prefer tax efficient ones like PPF.
It is that time of the year again, when you do your tax saving investments; don’t get overwhelmed with the sentiment prevailing in the market. On the contrary, it is possible to take advantage of it to maximise returns.
‘Making your money work for you’ is possible even when you invest for tax saving — you increase take home plus earn returns from the investment. Don’t invest only to the extent of tax savings — go beyond it, if your needs are such.
- Claim all forms of tax breaks — exemptions, tax-free perquisites and deductions. Tax savings investments provide good, guaranteed tax free returns.
- Use medical insurance to cover yourself and your parents. A family floater is a good option.
- Avail the home loan benefit — take advantage of lower prices and possibly lower interest rates
- Use Contrarian investing style to enhance returns on tax saving investments — in high markets, use low risk avenues and on market lows use ELSS Funds and ULIPs.
- Avoid last minute rush, invest early and submit your proofs on time.
- Evaluate post-tax returns before investing — what you see may not be what you get.
