Time for tax planning
If you look at the returns of ELSS funds, it may not be heartening. But that shouldn’t stop you from investing in ELSS this tax planning season
December may be the month to relax at the work place with a string of holidays but many may not be allowed to if they have not completed the tax planning exercise. With the year almost coming to an end and with slightly over a quarter to go for the financial year, it’s time to focus on tax planning.
A number of products offer tax relief as they are covered under section 80 C but this time investors can have a higher allocation towards equity markets as equity markets have come off their highs in the last three quarters. That provides a good opportunity for fresh investors if they are looking at building corpus over the next 3-5 years. With tax planning instruments like ELSS (equity linked savings scheme) and ULIPs (unit-linked insurance plan) allowing exposure to equity, investors can look at these two options.
In the case of ELSS, options are plenty as almost every mutual fund company has the product under its portfolio. However, going by the past performance and investment strategy, SBI Magnum Tax Saver, HDFC Tax Saver and Franklin Templeton Tax saver can be your preferred choices as these funds have been consistent with their performance. While returns from some of these funds may not look pretty at present (if you were to compare 1 and 2 year returns), the fact is that equity markets at present is going through one of the challenging times. In addition, weakness in the market is a good opportunity for fresh buying and hence, allocate a portion of your tax saving fund into this product.
Besides ELSS, unit-linked plans can be another option for tax saving as it allows exposure to equity. The advantage with ULIP is that equity is not the only option and the investor has the option of switching from one fund to another. However, at current market level, equity can be a better option for long term investors. In the case of ULIPs, plan features are similar among various insurance companies, but costs such as allocation charges, administrative charges and policy charges are the ones to look out for. Here again, these charges can make a huge difference for those looking at insurance as a short to medium term investment option with the payment term being less than 10 years. In the long run, however, there is not cause for concern, as most companies have similar cost structure after five years.
Even when tax planning is a necessity for many, not many have the advantage of liquidity. For many fresh and young investors, tax deduction tends to bring a better relief than tax saving investments as they need not worry about the investment! Such investors can go in for monthly payment mode through SIPs for ELSS and ECS in the case of insurance. However, such luxury may not be available for last minute tax savers with the year coming to an end in the next four months. So, look for lump sum for the current year and from next financial year, make it a point to sign up for SIPs.
Another option for monthly saving is SIP in a general fund or a debt fund and the amount can be transferred to an ELSS fund at the time of providing investment details to the employer. While debt funds give the comfort of accumulation without risk, equity funds provide the element of opportunity of earning higher returns but with the baggage of risk. Go for an option that suits your risk taking abilities.
