BEFORE YOU CHOOSE AVENUES FOR TAX SAVING -SERIES II

Indraneel Sen Gupta , Last updated: 25 April 2021
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In my last article I started with the advance planning stage for tax saving where one should to plan for tax saving starting from now so as to avoid eleventh hour preparation and most importantly Miss Selling. Since we often find that at the last moment preparation the few culprit Financial Agents or Advisors take the advantage of panic and does miss selling.

In this second series I will discuss on the one out of the two most hot picked tax saving investment tools.

Normally there is a thumb rule which one should follow for tax saving is that what ever is ones age, he should go for equity investment according to that age limit. It might sound confusing don’t worry I am removing the confusion. If my age is 25 years then according to the financial thumb rule I should have an investment portfolio of 25% in debt and remaining 75% in equity. This is calculated by simply deducting your age from a value of 100. If my age is 45 then I should have an equity portfolio of 65% in equity and 45% in debt.

This thumb rule is equally important for doing investment in Tax Saving too. Since in many case we find that all the investments in tax saving now a days is being parked in equity where ones exposure is often more than 100%.
Its true that equity investments fetches much higher returns as compared to other investment avenues. But just remember what happened to your tax saving funds when the Indian equity markets went for a rock bottom decline. We find that all the NAV of the major tax saving funds having exposure in equity went for a cascading fall in their NAV values.
Mark there is another thumb rule which needs to be abide that is always make calculation for negative returns too which will help you to calculate the amount of risk one can take. This is very much important at times when the market enters for a prolonged Bear market phase.
Now many of friends will say that equity investment is for long term. Since we all ways gain in log term equity investments. True. I agree will all of you but tell me one situation where one is having all his eggs in one basket.
So before doing any investment in tax saving instrument please calculate your current tax saving investment portfolios.
One should plan in this way that apart from doing investment in equity one should also try the other avenues available under section 80C for tax saving.

ELSS is one of the most picked investment tool for tax saving among all other tax saving avenues. ELSS stand for Equity Linked Saving Scheme. It is an mutual fund where all the pool of funds is invested in equity market with a ratio varying from 0-80% and remaining 20% in Debt fund.

This year doing investment in ELSS will fetch more advantage. As SEBI have scrapped Entry Load on Mutual Funds, all these tax saving ELSS are now free of entry load. This makes your investment corpus to get invested without any deduction of charges as earlier their used to be a deduction of 2.25%. So if one does an investment of Rs.10000 his total investment will be Rs.10000.Where as in earlier case there is used to be a deduction of 2.25% which amounted to your investment of Rs.9775.This makes the ELSS more attractive this time for doing investment in tax saving.

Few Things one should look in to before doing investment in ELSS.

· Make a detailed calculation of your current status of your tax saving investment portfolio.

· Before investing in any ELSS look out for the negative returns the fund have generated before looking into the positive returns. This will help you to judge the fund performance in negative times. Since in every bull market even the worst funds works superbly. To judge the performance look for Sortino ratio of the ELSS.

· The Sortino ratio classifies risk in terms of upside and downside risk. It arrives at a minimum acceptable return (MAR) for an investor. Whenever the fund return is less than the MAR, it adds the underperformances, but does not add out performances. This is a better measure of risk than volatility

· Don’t get lured by the Dividend promotion campaign of ELSS. We have often found that during tax saving months that is from January to March many fund houses comes out with dividend module.

· One must know that after dividend declaration the NAV of the fund drops down.

· When a fund pays 40% dividend, for instance, its net asset value drops from Rs10 to Rs6. So investors get back part of the principal amount invested in the form of dividend, with no value addition by the fund house.

· So avoid this type of traps. Since your investment will get locked for 3 years. So if the fund performance is not too good during downward trends of the market, the fund might not be able to scale back and provide you some return at the end of the third year in case the equity market remains bearish for 3 years.

One more thing I would like to inform all my tax saving friends that this time you’re Financial Agent or Advisor might not suggest you to do investment in ELSS. Since as entry load have been scrapped by SEBI the agents will not get any commission out of the ELSS. So you might find some new marketing strategies by your advisor pushing you hard to do investment in insurance or some other product which carries some commission.

So in this situation all you need to do is to do an advance planning for tax saving. That’s the main reason why I have started asking you before 4 months to do your tax saving investment calculation.

Don’t do last moment preparation and don’t cry later on that I have been miss sold .Miss selling never happens in one way. Both the parties the client and the advisor is involved.

In my next article I will bring out the hard ugly pictures of Tax Saving mistakes and their solution to avoid.