Have You Invested For Tax-Saving Yet?
Chief Executive Officer, Wiseinvest Pvt Ltd.
With less than three months to go in the current financial year, it’s time to invest for tax-saving, if you haven’t done that already. While many investors find it uninspiring to plan their tax-saving investments, the fact remains that if you plan well and choose the right combination of instruments, you can achieve much more from them, in addition to saving taxes. Simply put, you must always plan your tax-saving investments. Remember, good tax planning starts with calculating your tax liability and identifying your risk profile.
This must be followed by choosing an option that can get you the best that specified instruments under Section 80 C have to offer. Unfortunately, many investors make the mistake of not giving tax-saving investments their due. It is quite common to see tax-payers investing for tax-savings at the fag-end of the year. More often than not, they end up investing a significant part of their tax-saving investment in options like National Savings Certificate (NSC), Public Provident Fund (PPF) and five-year tax-saving deposit. While these options provide capital safety, investing in these options alone can make it difficult for you to beat inflation in the long run.
No wonder, the end result is usually a haphazard portfolio and a wasted opportunity to get the best from their tax-saving investments. Moreover, the habit of investing at the fag-end of the financial year puts a lot of financial burden in the form of having to generate a lump sum amount. While you will have an opportunity to plan well for your tax-saving investments at the start of the next financial year, this year you can take an important step of making mutual funds a part of your tax-saving investments. Equity Linked Savings Scheme (ELSS) of mutual funds qualifies for tax exemption under Section 80C of the Income Tax Act.
An ELSS is perhaps the best way to achieve the dual objectives of saving taxes as well as participate in the growth of the stock market. Of course, being equity-oriented, these schemes carry all the risks that are associated with an equity investment. However, a three years’ lock-in period ensures that the impact of volatility – one of the major risks of investing in an equity product – gets minimised. Moreover, by strategizing your investment in an ELSS through the financial year by enrolling for a systematic investment plan (SIP), you can not only further reduce the impact of volatility in the stock market but also make the process less taxing for yourselves.
As a product category, ELSS has given handsome returns over the years. While the past performance alone should not be the sole criteria for making an investment, there is no denying that ELSS has the potential to provide higher returns compared to other instruments. In fact, by aligning your investment in an ELSS to a long-term goal, you can make it an integral part of your portfolio. ELSS is governed by guidelines issued by the government. These guidelines have specified the minimum amount to be Rs500 and thereafter in multiples of Rs500. Besides, ELSS has the shortest lock-in period amongst all investments eligible under Section 80 C.
As regards the investment pattern, these schemes have to invest at least 80 per cent of the corpus in equity and equity-linked instruments. However, each of the fund houses launching ELSS can decide its own investment strategy. Therefore, the portfolio composition becomes a major deciding factor while selecting an ELSS. Therefore, instead of relying completely on past performance, you must also take a closer look at the scheme’s exposure to different segments of the market, i.e. large, mid and small-caps as well as the quality of the portfolio before investing in it. Although past performance can’t be ignored completely, you must also focus on long-term performance of the fund as well as the risk taken by the fund manager in achieving those returns.