When it comes to investing to save tax, most of us are gurus already. After all, we have been investing to save tax for many years and that too profitably. The Public Provident Fund (PPF) has been delivering attractive post-tax returns. The equity heavy ULIP has done phenomenally well on the back of rising markets. And then of course the tax-saving mutual funds have had a fantastic run in the last few years. In short, the results have been brilliant. So why tinker with this 'traditional' approach of investing to save tax?
In our earlier message to you we dealt with the PPF as a tool to save tax [Read]; now we focus on stock market linked instruments which are so popular today.
A rising tide lifts all boats
Here's a fact - everyone who invested in a tax-saving mutual fund has made a lot of money over the last few years. And this should not be surprising given that the Indian stock markets have recorded their biggest gains in recent years.
No matter which mutual fund you invested in, irrespective of whether well-managed or not, as long as the underlying asset was equities, you made money.
In rising markets, the more risk you take, the more returns you make
In fact, the more risk you took, the more returns you made. If you had more equity in your portfolio or if you invested in the more aggressively managed mutual funds, you made more money as compared to someone with a more moderate exposure.
And why not…the average return of all tax-saving funds over the last 3-Yrs (15 schemes) was an unbelievable 45% CAGR!
In short, the going has been great! The returns are fantastic. But…
While you may actually deserve the credit for these gains in your portfolio, frankly, for most of you, most of this success can be attributed almost entirely to the one-way surge in the stock markets.
Over the last few years you have taken unnecessary risk by first increasing your exposure to equities beyond the desired level, and second, by investing in equity linked assets which are not-well managed or are not suited to your risk appetite. If you persist with what you have been doing in the past, you may be in for some unpleasant surprises.
Understand the risk of making a poor investment decision…
The range of returns from all tax-saving funds which have a 3-Yr track record is very wide from 67.6% CAGR to 28.1% CAGR. So, even if you were in the 28% CAGR fund, you did well. Undeniably, there has been a cost for having made a poor investment decision, but it has not pinched as much, since you still made good money.
But the fact is that adjusted for risk, you definitely made a poor investment decision. In other words you could have achieved a lot more, and too by investing sensibly, with your money!
This is not to say that the top-performing fund would have been the right choice. Quite to the contrary, if you were advised by Personalfn, you would have actually given the top-performing fund a miss too… for various reasons.
At present there are 23 tax-saving funds out there (and more on the way). And at Personalfn we do not consider most of them to be investment grade. Which fund suits you best, will depend on your risk appetite, expectation of return and your overall asset allocation.
The future will reward smart fund managers
As stock markets turn more volatile, and the choice of funds increases, it will become pertinent to make the right investment decision to start with. Going forward, the well-managed fund will outperform the 'more-risk-you-take-the-more-return-you-make' type of fund.
Understanding this is an important step to building a smart investment plan that is geared to saving tax.
Personalfn can help you save tax. Smartly.
If you are looking for honest recommendations on what you should do with your money, then Personalfn is the solution for you! Backed by our solid process-driven research initiative, we will be able 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. [Read more]
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