The investment season heats up in the run-up to the end of financial year March 31 — the deadline before which you have invest in qualified saving scheme to claim income-tax deductions.
Typically, every finance company comes out with a host of tax saving instruments during the tax season for tax masses but you must need to carefully sift through them to suit an instrument that suits your individual needs.
Though investment helps you to save on taxes, you could be mismanaging investments that can help you retire early, if tax saving becomes your primary goal of investment. So while drawing up your investment plan, you need to have the larger objective of creating wealth for the future in mind, rather than a last minute rush to save tax. For this, you need to decide on your investment objective and horizon.
Investment objective
The objective of any investment is to get specific returns or an approximate sum of money at the end of the investment horizon. The objective should be realistic and must take into account the risk appetite of the investor. For example, if you are an investor with a low risk appetite, you should not invest in stocks and should not expect 20 per cent returns over the period. At the same time, a risk taking investor can build wealth by investing in equity and equity-oriented mutual funds over a longer term.
Investment horizon
As an investor you should consider your investment horizon while choosing investment assets.
Risky as-sets such as equity and equity-oriented mutual funds are not a good choice for the short-term investments. Their returns fluctuate drastically in the short-term but tend to provide good returns over a longer period of time. Those who are interested in short term investments should look at debt assets such as company deposits, government bonds, bank fixed deposit. Similarly, if you wish to stay invested for a longer term, you should consider investing in equities and equity-oriented mutual funds. Investing in debt will incur opportunity cost.
Points to remember
Investment planning should be done in advance. You should not wait for the tax filing season to arrive. Investors often make the wrong choices in the last minute rush to save tax. Remember that you do not save much in taxes as Section 80C allows a maximum tax deduction of Rs 1 lakh.
This amount is so small that PPF alone can cover the entire Rs 1 lakh, as the maximum inve-stment limit on the scheme has been recently increased from Rs 70,000 to Rs 1 lakh. Even otherwise your EPF and insurance will cover most of it.
If you still need to invest, you should do it as the saving itself is equivalent to 30 per cent of returns immediately. Infra bonds under 80CCF were re- introduced last year to help increase the tax savings and is useful solely for this purpose for most individuals who are intent on saving tax.
Secondly if you have not taken up any investment for tax savings, there is no need to panic. Do your own research and take your time. If you find nothing, don’t buy. It is better to pay taxes than lose out more than your tax liability in bad investment. Some investors invest in properties just to save taxes. This is fine, if you have enough disposable income to pay the EMIs. However, if your disposable income is not enough to afford the EMI, avoid investing in property. Property is not easily converted to cash because it takes time, due diligence, and enormous paperwork to sell.
Investment planning also requires expertise. The good news is that this expertise can be learnt provided you spend some effort and time in this di-rection. Before investing, you need to look at the past returns over last 10 years; its ratings, PE ratio, etc. A healthy financial portfolio is an ideal mix of short and long-term investments or the right ratio of debt and equity instruments.
The writer is the CEO of bankbazaar.com