It is that time of the year when tax planning becomes a priority and everything else is secondary. We read every single mail that our readers send us. Of course, we can be forgiven for not replying to all, but we cannot be let off the hook for ignoring what we read. What we did notice is that in the months of January and February, we were flooded with queries regarding tax-saving funds. Come April and May, and that dwindles down to an odd question here and there. Which is why we want to talk to you about tax-saving mutual funds in the last quarter of this financial year.
Tax planning should not be the result of a knee-jerk reaction when March 31 is nearing. It should form a strategic part of your entire financial plan. The biggest mistake investors make is to view their tax avenues in isolation and give it a thought just once a year. When deciding how much of money you need to allocate to fixed return and equity and how you should distribute your risk, tax saving instruments must be taken into account.
There are various reasons why we recommend tax-saving funds. Referred to as Equity-Linked Saving Schemes (ELSS), their benefits are tremendous.
They do not have any restrictions. If you choose to, you can invest the entire Rs 1 lakh available under Section 80C in these funds. If you are young with no dependents (hence no life insurance premiums), not repaying any home loan (repayments also get a Section 80C deduction), and prefer a higher exposure to equity, you could consider exhausting the entire limit. They give you the benefit of higher returns. You can get 8% with your PPF and NSC. But if you can get a 50% return, coupled with a tax benefit, why be stupid?
And, if you hate blocking your money for years on end, then this one surely fits the bill. The lock-in period is just three years. When you sell after three years, you pay no capital gains tax. So you get the tax benefit when investing and you pay no tax on your profits.
But you have to play it smart. Choosing a right fund is critical. That is why we have analysed a few here. And how you invest also makes a difference. This brings us to the issue of why we are talking about such funds now.
The best way to invest in a mutual fund is via a systematic investment plan (SIP). So you commit to putting away a fixed amount every month. This is an automatic savings habit that will hold you in good stead in the long run and helps you ride the ups and downs of the market. This year, volatility is a given in the market. And you need to be consistent in your investments to do well. If you invest in one go, you will be at the mercy of the market.
Moral of the story: Start early.
?The author is CEO, Value Research
