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Investing to Save Tax? Here are 3 Ideas
Investing to save tax is an annual exercise that you happily participate in. And why not?! You stand to save about Rs 34,000 in taxes! But in all probability, tax-planning is not something you spend much time on. You do the same thing, year after year. As long as you invest the Rs 100,000 in designated instruments, you save the tax.
So, why bother rethinking over your tax plan, right?
Wrong!
At Personalfn we interact with thousands of individuals every year. Some of these individuals approach us for their tax-planning. And what we see in terms of the thought process and the historical investments to save tax usually alarms us. In most instances, both the allocations as well as the actual instruments where the monies are invested are not in line with the profile and needs of the individual. And, in nearly all instances, tax-planning has been done in isolation i.e. it is not a part of the overall financial planning. The result: a sub-optimal portfolio, which just saves you tax.
But you don't have to make the same mistakes, again
In this note, we present three ideas which, if implemented well, will ensure that you do not make the same mistakes. In fact, these ideas will go a long way in ensuring that you not only save tax, but also achieve your other long-term financial goals!
So, here goes….
First Idea - Don't invest just to save tax
Do this simple exercise. Take out a pen and paper, and list down all your long-term goals and objectives. We can bet the list includes goals like providing for your child's education and your retirement needs. What this list will not include - tax-planning!
And that's precisely why when you are investing money, you should have a 'real' goal in mind. And when executing the investment solution to meet that need, you need to look for tax-efficient instruments. So, for instance, if you need to save for a need 10-Yrs out, and have appetite for risk, then you will need to invest monies in equity funds. The tax-efficient option here could be to invest in a well-managed tax-saving mutual fund. In this manner you are able to achieve two objectives with the same amount of money!
Of course the most popular instrument amongst investors is Public Provident Fund (PPF). Should you be investing in the same? Read on…
Second Idea - It's not easy to select the right tax-saving fund for you
Since 2003, the BSE Sensex has appreciated by about seven times - from sub 3,000 levels to over 20,000 now. This huge appreciation in value has ensured that irrespective of which fund you invested in, the returns have been great. But if you look more carefully at the numbers, there is a huge variation in performance across funds. Just to put a number here, the difference between the best and worst performing tax-saving fund over the last three years was a whopping 40% CAGR!
There is a wide variety of tax-saving funds out there. A lot of them have done very well in recent years, simply because they took more risk with your money. Such funds should clearly be avoided. Going forward, as the stock markets no longer move in a unidirectional manner, the smart fund manager will once again outperform those who have been playing the momentum.
Of the 23 or so tax-saving funds which are available today, only a few of them, in Personalfn's view, are of investment grade. Be sure you have selected the fund that suits you best. Read on…
Third Idea - You can invest now at 13,000 Sensex levels
Let's say you need to invest Rs 50,000 in equity funds as part of your financial plan. But you are worried that it may not be wise to invest in the stock markets at over 20,000 levels (of course that would not be the right logic, but for argument's sake let's keep it this way). So, what do you do?
Well, invest in a tax-saving fund. And how will that help, you ask?!
Well, that's what smart investing is all about. If you are in the highest income tax bracket, every Rs 100 you invest in a tax-saving fund, saves you just under Rs 34 in taxes (of course the overall investment under this Section of the Income Tax Act is capped at Rs 100,000 pa). So, if you invest in the Sensex at say 20,000 levels, then adjusting for the tax benefit, you actually are investing at about 13,000 levels! So, as far as you are concerned, the investment no longer appears to be at expensive valuations!
To understand better how you can use tax-saving funds to your advantage, click here.
Personalfn can help you save tax. Smartly.
If you are looking for honest recommendations on what you should do with your tax-saving money, then Personalfn is the solution for you! Backed by our solid, process-driven research initiative, we are equipped to guide you on how you should go about investing to save tax. We will guide you on the asset allocation that suits you best; and we will also tell you which tax-saving funds are best for you. And of course we will provide you all this guidance at a time and venue that suits you best!
If you still need more reasons to meet us, please click here to know more about our services. We look forward to having you as our client!
If however, you already have an existing relationship manager, and wish to check his recommendations with ours, you can subscribe to our fee-based service - FundSelect Plus.
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