The Hindu Business Line : Tax investments and risk

Tax-saving investments, like other investments, should be based on your ability to handle risk and the time for which you are willing to stay invested. A look at some options and their suitability.

Anil Rego

Do you rush to make your tax saving investments at the fag end of the year, and end up making haphazard choices?

Your tax saving investments, like other investments, should be based on your ability to handle risk and the time for which you are willing to stay invested. Here’s a quick round-up on the options and their suitability.

Two categories

Section 80C offers a deduction of Rs 1 lakh, irrespective of income brackets, that civers several options both debt and equity. Some of the items allowed herein are – Employee contribution towards PF (Provident Fund)/ VPF (Variable PF), NSC (National Savings Certificate), Infrastructure Bonds, Bank Fixed Deposits (Minimum lock-in of five years), ELSS (Equity Linked Savings Scheme), Traditional Insurance, ULIPs and Pension Plans. However, the entire set of investments can broadly be divided into two categories – Conventional Instruments and Equity Instruments.

Conventional Instruments

A risk-averse person can have a significant part of his investments in conservative investments. While choosing, keep in mind the post-tax yield since many avenues have returns that are taxable.

Align your investments (Tax Saving and otherwise) in line with your key financial goals. If one were to typically look at conservative instruments, liquidity may take a hit.

Equity Instruments

These are riskier than conservative instruments and do tend to fluctuate with stock market values, but in the long term could give good returns. These investments are best suited for a medium-long term need.

You can avail of the Systematic route of investments, which will help cut your downside and be easy on your pocket.

There are two instruments within this genre of investments.

Equity Linked Savings Scheme (ELSS): These are tax saving MFs which have a lock-in of three years. They are equity linked, hence the risk is inherent. The three-year lock-in reduces the volatility given the medium term perspective.

One can use the Systematic route which will provide you with a rupee cost averaging benefit. This allows you to buy more units during a downward run and lesser units when the markets are charging upwards and actually reduces your risk. SIP is also easier on your pocket, you can commit as low a sum as Rs 500 per month.

Unit Linked Insurance Plans (ULIPs): This is a mix of investments akin to Mutual Funds and Insurance. Unlike ELSS schemes, where you are completely invested into equities, you can choose between Equity/Balanced/Debt based on your risk profile. One can also choose a combination of these funds in any ratio. There are two distinct features of ULIPs — cumulative withdrawal facility after lock in (normally three yrs). One can invest by Systematic Investments.

The switching facility is a unique opportunity which can help a sophisticated investor achieve high, who can get his asset allocation right. Let’s say you are worried about markets moving down and you have put all your funds into equity, now you can move it into Debt or Balanced, thereby restricting your downside. ELSS would be best suited for an investor with a time frame of three-five years and ULIPs would work best for someone looking to build a corpus with a six-seven-year-plus perspective. It is however, pertinent to choose the right ELSS and ULIPs.

For someone who has invested at a stock market peak and contemplating what is to be done this year, here’s a word of advice, ‘Stay-put’, continue buying during the downturn, this will help you average, this is indeed a significant tool to reduce your losses. If you have bought into ELSS last year at market highs, then don’t forget to buy some during such lows, which will help you cut your losses. However, use a combination of high and low risk avenues for best returns.

(The author is founder and CEO, Right Horizons Consulting.)

More Stories on : Investments | Income Tax | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page