Hasty investment decisions, more often than not, are error-prone and lead to regret later. Let’s look at a few common mistakes that investors make.
It’s that time of the year again when we realize the folly of delaying our investments for way too long, only to find ourselves running from pillar to post to invest in eligible investments for tax deductions. As they say “act in haste, repent at leisure”. While quick decisions are not necessarily bad, more often than not, hasty decisions are error-prone and lead to regret later. Let’s look at a few of the common mistakes that investors make:
1. Thinking solely about tax saving without thinking about wealth creation
Tax-saving investments which save tax and have an element of investment are supposed to create wealth. As simple as this statement may sound, this fact is lost on most investors, which they should be mindful.
2. Using contingency funds for tax-saving investments
The last-minute investments to save taxes put pressure on the finances of many individuals, especially those who have just started their career. In an effort to make the most of tax deductions, people commit a cardinal mistake of using their contingency funds for this purpose.
3. One product approach
If one looks at tax saving as a cumbersome exercise to be gotten rid of at the end of the financial year, then there is a high likelihood of investing the entire eligible amount in one investment vehicle without considering one’s financial goals and risk appetite.
4. Buying endowment insurance plans
Endowment plans are a mix insurance and investment and tend to be costlier than term plans. Further, returns on endowment policies are low and cost structure relatively less transparent which undermines its utility as an investment vehicle. Since it’s a bundled product, insurance cover provided by it is lower and results in inadequate cover. Instead, it is advisable to buy term insurance with adequate coverage considering your age, income, dependents and existing wealth.
5. Lack of awareness about multi-year commitments
Certain products like ULIPs, endowment insurance plans etc involve multi-year commitments. Any failure to pay premiums in subsequent years results in revocation of the policy. Investors, at times, are unaware about this aspect.
6. Shying away from equity
Although equities are volatile in short term, they yield higher returns in the long term and outperform other asset classes. Shying away from equities hampers your ability to generate adequate wealth in the long run. Since ELSS returns are impacted by volatility in equities, it is advisable to invest in ELSS (Equity Linked Saving Scheme) through the SIP route to benefit from rupee cost averaging.
7. Ignoring lock-in period
Investments in ULIPs, PPF, endowment policies have longer lock in period as compared to ELSS. Ignoring lock in period of tax saving investments can throw your financial plan into disarray.
8. Not thinking beyond 80C
Apart from 80C, there are other sections like Section 80D (Mediclaim), Section 80G (Donations to charitable organization), and Section 80CCD (National Pension Scheme), which taxpayers are usually unaware of. They should, therefore, try to make the most of them to save tax.
While you may have missed the bus when it comes to planning your tax-saving investments in advance for this financial year, you can certainly avoid these common mistakes by putting some thought into this and avoid regrettable investing decisions.
(By Shyamali Basu, Senior Vice President & Head – Products & Marketing, HDFC Asset Management Co Ltd)
(Disclaimer: The opinion expressed in this article is that of the author alone and not of HDFC AMC, and should not be regarded as investment advice. Investors should obtain their own independent advice before taking a decision to invest in any securities.)