LoanRaja Blog- Personal Finance Guide

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.

When the stock market goes through an uncertain phase, it is not only the equity investors who have tough times but even those who have invested in insurance plans with ULIP features. Unit-linked plans, as you know, allows investors to take exposure to equity markets as the premium amount gets invested in a combination of various equity schemes or debt schemes chosen by the insurance policy holder. The popularity of ULIP was in direct proportion to the stock market performance as investors realised that their insurance policies were capable of offering a annualised returns, in excess of 20%, besides providing the comfort of risk cover.

With the stock markets changing gears completely in the current year, many have suddenly turned away from ULIPs. While market uncertainty should not be a concern for those signing up for long term insurance plans, investors can also look at other options. One of the simpler strategies is to go for a combination of insurance policies and those who don’t like endowment or ULIPs can settle for a combination of both! In fact, ICICI Prudential Life Insurance has this combo product, Invest shield.

As the name suggests, this is an insurance plan with the primary objective of protecting the premium paid by the policyholder. Hence, the policy offers the guarantee of premium, similar to endowment plans. The similarity between this product and endowment ends there. Some of the other features are a derivative of ULIP with much lesser risk. For instance, the premium paid by the policyholder gets into a balanced fund which will have an equity allocation of 60% and the balance would be in debt.

However, the investor does not enjoy the choice of funds like ULIP. The allocation of 40% in favour of debt enables the fund manager to reduce the risks of equity and arrests the negative returns in a bearish market. Even in the current market environment, the performance of balanced funds has been less painful when compared with diversified equity funds.

Life Insurance Policy with Tax Benefit & Flexibility In Payment of Premiums

One of the key features of ULIP is that it allows flexibility in payment of premium. For instance, an investor can discontinue his premium payment after five years and still enjoy the life cover for the next five years. ICICI’s Invest Shield too offers similar advantage as an investor can discontinue the premium payment after three years. However, he would not be eligible for premium guarantee in such a case but would be eligible for survival benefit (or death benefit as the case may be). The maturity amount in this case would be the fund value depending on the market conditions.

The product is ideal for those who worry about their contribution in an investment product. The premium guarantee ensures that the investor gets back the amount contributed though in reality, one can expect double digit returns as the premium is invested in a balanced fund. Over the long term, balanced funds have the capability to provide good returns and in a bull market, their returns are on par with diversified funds. However, investors should take a long term view as this will enable them to enjoy the cycles of equity markets.

Besides providing the comfort of premium guarantee, the product also offers tax benefit under Section 80C and offers higher insurance cover like ULIP. For instance, a premium of Rs 25,000 per annum can ensure a life cover of Rs 1.25 lakhs the multiple goes up when the premium amount is high. The product can be part of a young investors tax planning portfolio in the early stage their of career. LoanRaja can help you help you narrow down the right options for ULIPs and other life insurance investments — all you need to do is fill out our short life insurance application.