Tax saving investments – No last minute blunders please!
As it happens during the end of every financial year, many retail investors are seen grappling with their last-minute tax saving investments. Many insurance companies also work overtime during these last few months (Jan-March) to sell as many insurance policies to salaried investors as they can. Why? They are soft targets during this last minute tax saving exercise. Investor’s focus during this time is to save tax and not what returns it will generate over the long term or is the product really worth it or if the product can be more of a liability over next couple of decades rather than wealth creation product as the majority of insurance policies turn out to be.
To many investors I have met, they have accumulated 3-4 such policies over the time and now can’t decide if they would like to discontinue them or not in spite of being very well aware of the fact that such policies are likely to generate minuscule returns over the long term also. These policies moreover will run for the next 15-20 years, that means every year as part of your investible surplus – you will end up allocating a certain percentage (as annual premiums) to such inefficient investments which can jeopardize your financial future in the long run. We must understand, that in this age of challenging jobs, high inflation of everyday usage items, high medical and education costs and other ever increasing household expenses – investible money is only finite. So one needs to make sure that every single rupee should be invested in productive investments only.
I would like to trend caution to the first time investors, recently into their first jobs. Make sure you don’t fall prey to such investment products. Instead of such policies, one must look for good long term tax saving investment products which not only save tax but also create wealth over the long term.
So, during this tax-saving season what investors must be wary of :
(a) Insurance-cum-investment products – Please keep insurance and investment products separate. Outright ‘No’ to policies which are insurance-cum-investment products. They always turn out to be long term disasters in the long term financial portfolio. If you want to cover your self, buy a term plan as the preferred option. If you are looking for long term investment products and tax saving, Equity Linked Saving Schemes (ELSS), Public Provident Fund (PPF), Voluntary Provident Fund (VPF), Sukanya Samriddhi Yojana can be opted for depending on your risk profile, kind of investment (equity/debt) you are looking for your overall portfolio allocation and goals you looking to achieve over the long term. In this article, we will not discuss any specific products buy bottom line is to stay away from such products upfront, even if the broker is your friend, relative, a friend or relative, close family member etc.
(b) Not investing in Equity Linked Savings Funds (ELSS) just because it is associated with investing in equity markets– ELSS funds are excellent long term investment products which not only help you save tax but have great capability to generate long term wealth. Amount of wealth created by some of tax savings funds HDFC Tax saver fund, ABSL Tax Relief 96 fund, Reliance Tax Saver is impeccable. Some of the new kids on the block such as Axis Long Term Equity Fund, Mirae Tax Saver to name a few have also impressed with their performance so far. Above funds are for reference purpose only and not an investment recommendation of any sort. Investors who have a long term time horizon must look at some of the good ELSS funds. However, investors must be mindful that ELSS funds also come in different flavors such as large-cap, multi-cap, mid-cap, MNC focussed funds. So invest as per your risk profile and not only on the basis of past returns. Remember, ELSS funds are not confined to save tax. They are also meant to create wealth over a very long term. As regards three-year lock-in, investors must look that as a blessing to keep you invested for the long term.
(c) Not evaluating the increase in Voluntary Provident Fund (VPF) – For those investors who are equity-heavy already and are contemplating a debt investment as part of tax saving exercise, investing via Voluntary Provident Fund can be a sensible option. Of course, this advise is for investors from next financial year but I am mentioning it here, as, in most of the companies, one can modify the VPF allocation only once, during the April time period. VPF interest rates are at par with PF and make it a very compelling option. Also just like PF, it gets deducted from salary month on month which removes any human intervention.
(d) Giving Sukanya Samriddhi Yojana a miss – Sukanya Samriddhi Yojana is an excellent, government-backed scheme for your girl child. Investors must give it a good thought to take care of debt allocation for goals such as child marriage and education. However, investors must make a plan as regards allocation to this scheme every year and not just open account for the sake of opening it and then struggle to keep it active by barely depositing minimum investment amount every year.
(e) Investing right at the end of financial year – Though for this year, its too late but please make sure from the next year onwards avoid lump sum investments, especially in equity-linked products. Prefer to invest systematically month on month ( for instance, investments in ELSS funds via SIP mode). In investments like PPF, it always beneficial to invest right at the beginning of the financial year. So make a suitable plan and implement it accordingly. No procrastination.
(f) Not going in details of each investment product – We have a lot of time to chat on and posting updates on social media but seldom read complete policy document or details about the product specifics. One must evaluate historical performance, kind of investments it makes, taxation, redemption, lock-in period aspect etc. Make sure you go through the policy document (after purchase), policy brochure, company website other reviews etc. in detail, ask questions to advisor and only then take a plunge. Ask questions first to self as to where it fits in your overall portfolio. Randomly accumulating policies will do little good in the long term as a few years down the line you will be running pillar to post to close them.
(g) Ignoring deductions under medical insurance and NPS – Investors must look at all tax saving avenues besides 80C such as deduction under medical insurance and National Pension System. NPS is a government back pension scheme and is gain traction lately as you can invest 50,000 for deduction under Voluntary contribution and also can have your employer contribute 10% of your basic in NPS every month. Medical insurance is more about covering self and family against any eventualities than tax saving aspect. Still, you can avail tax benefit against medical insurance for self and also paying the premium for parents.
Do remember that tax saving investments are not just to save tax alone but they must map to your long term financial goals. Don’t invest in isolation. Plan your tax saving investments at the start of the financial year to avoid grappling for forced investments at the last minute which more often than not are erroneous. Beware of investing in highly inefficient low yielding investments where you will eventually be forced to invest for the long term because of policy dynamics. Even if it’s now too late to plan for investments for this financial year, take an informed decision and not an enforced one. All the best!
Disclaimer: The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions. The author is investing in ELSS funds via SIP mode.