Invest In Tax Saving Mutual Funds Online
Some tips for approaching the ritual of tax-saving investments in a systematic way to avoid last-minute rush
It is a story that is told innumerable times during the first three months of every New Year. Financial advisors of every hue would recount horror tales of how individuals who rush for 'last minute tax planning" end up with an investment portfolio of "wrong products" that doesn't serve any purpose. However, the moral of the story seems to have had no desired impact on the audience. Most financial advisors claim that the ancient practice of last minute rush is going on even this year, too.
It seems, most people don't think about tax planning until their finance department asks for details of investments. Typically, they end up buying insurance products, as insurance companies are most active during this period. In fact, most of their business comes in the period of January to March. As a result, it is not unusual for wealth managers like him to come across clients who have bought 20 to 25 insurance products over the years. A financial planner claims he recently dealt with a new client who had purchased 48 insurance products.
As you might have guessed already, "wrong product" in financial parlance means an insurance product and financial advisors often claim that most buyers are saddled with these products — ranging from term plans to unit-linked products to pension products — forever as they have no idea how to take remedial actions.
The trouble with most of the insurance products is that these are costly and are also long-term products. Also, it is not easy to get rid of them because they come with front-end charges, surrender charges.
Getting rid of them is a painful process for us because we have to go through each product and do a cost-benefit analysis to figure out what to do. It is equally painful for clients because in some cases they will lose money as most insurance products wouldn't make money in the first few years because of charges deducted upfront from the premium, and they also have to forego some more money because of surrender charges.
Perils Of The Friendly Advice
The trouble begins when someone shops for tax-saving instrument in a hurry. If she walks into a bank for a 5-year fixed deposit that would fetch deduction under Section 80C, the bank official would start talking about a product that gives assured returns plus lot of extra things that an FD doesn't offer.
If it is not a bank official, a neighbourhood investment expert is always there to sell an insurance product with a very small cover because it would fetch him a better commission. Investment experts say most individuals go blindly by what the sales person says and they don't even bother to cross-check the basic facts. Since they are in a rush, they don't actually have the time to get into the details. They are mostly happy that their tax-planning is done for the year.
Remember A Few Basics
It is mostly the youngsters and those in the middle-income group of . 10-12 lakh or below who shop for investments under Section 80C of the Income Tax Act this time of the year.
First, a salaried person should find out how much he contributes to employees provident fund every year. In most cases, it would be around . 50,000-70,000. That means, he can invest just . 30,000 to . 50,000 under Section 80C. They should first try to buy a term insurance plan for a very large amount.
If any money is left, they can consider investing in tax-saving mutual fund schemes since it will give them a small exposure to equities. As for self-employed professionals, his advice is to put the money in a public provident fund account. Since they don't enjoy a pension, this would be very useful.
Prepare For A Surgery
According to experts, the serial offenders with innumerable insurance products need to wake up at the earliest to undo the damage to their financial health. There is no easy way of dressing up with a bandage. The only solution is painful surgery. One should try to consolidate the portfolio after weeding out really bad products after a careful consideration.
It is not humanly possible to track or manage 20 or 30 products. Also, people fall for the habit of monitoring good investments and ignoring the bad ones.
Unlike other investments available under Section 80C, it is not easy to get rid of insurance products. If the client has a cash flow problem and can't continue with the products, we carry out a cost-benefit analysis before getting rid of them. According to him, investors should try to look outside such insurance products as it offers them greater control over their tax planning.
If you are investing in a PPF account or ELSS, you can always change your allocation every year. It is not possible if you buy a costly insurance product that comes with a long term commitment. This would become crucial if there is a change in tax laws.
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