If tax saving is driving all your investments, you may be compromising on your returns or missing out on what an investment asset can offer otherwise.
Ravi wanted to save up for the down payment of his home and he had two years time to build a corpus, but since the financial year was nearing its end, he decided to invest in a way such that he would earn return and save tax simultaneously. He ended up investing in a tax-saving instrument with three years lock-in. Neither was his return assured.
So, if tax saving is driving all your investments, you may be compromising on your returns or missing out on what an investment asset can offer otherwise. Tax saving is crucial to financial planning, but choosing an instrument such as insurance solely on the basis of tax benefits is a poor decision. It’s, therefore, important to understand the purpose of a financial product.
What could it cost you
While there are many examples of people digressing from the actual purpose of investing, these are some of the ugly outcomes:
# Failing to meet financial goals in time
Tax-saving instruments often come with a lock-in period and investors sign up for these products in eagerness to save tax without looking at the exit load or understanding that the fact that these instruments are long term. Couple of years into the investment, they either discontinue with the investment or compromise on their financial goals.
Investments must be made basis your financial goals, time you have in hand and your risk appetite. For a short-term goal you must choose an investment product that allows you easy exit anytime.
# Under-insuring the family
There are millions who purchase insurance to save tax. The proof lies in increased purchase of insurance in Jan-Feb-Mar. They do not assess the insurance needs of the family and make the purchase decision solely on the basis of tax-saving requirements. In the end of the policy period, they get a paltry return. Either the family is left underinsured or there is discontinuity in the policy. Insurance is a long-term commitment and in order to make the most of it, it’s important to stay invested for a long time.
# Purchase of unnecessary products
Every penny should serve its purpose. Big purchases such as residential property are made getting attracted to tax benefits under Section 80 (C) and Sec 24 without having an end goal. Needless to say, some are just acts of tax evasion. Purchasing a property is a long-term commitment and it should either serve its purpose as an investment or fulfil your purpose of stay.
What should you do?
Your primary focus should be to invest as per your financial goal. Tax saving should be looked upon as an additional benefit. If you find investment assets that can help you attain your financial goal and offer tax benefits, you get the best of both worlds but put your investment goals higher up in the priority list.
(The writer is CEO, BankBazaar.com)