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[ SUNDAY, JULY 08, 2007 12:18:18 AM]
Many of you may be making those
all-important tax-saving investments. There is nothing really wrong with such an
investment strategy, as it only improves one’s post-tax returns. However,
there is also a need to exercise caution and prudence.
The reason is
that often an investment made to gain tax benefits equals the overall saving
made by an individual during that year. Therefore, experts advise that tax
investments should be taken as a serious portfolio building exercise and handled
with adequate care.
Usually, these investments are in the range of
Rs 50,000-Rs 1 lakh and most people prefer to opt for safety in the routes
undertaken. Small saving schemes are among the least risky tax-saving
instruments and many investors in the past have invested largely in such
schemes.
PPF (Public Provident Fund) and NSC (National Savings
Certificates) are among the preferred instruments for getting tax benefits from
the post office stable as they are eligible for Section 80 C benefits.
However, these schemes have inherent characteristics, due to which,
earnings will be impacted over the years. For instance, if youve been investing
in PPF scheme, then it could be seen that its interest rates have fallen over
the years.
The earnings rate applicable is the figure actually
declared for a particular year, unlike the NSC, where an investor can lock in to
the rate for the duration of the instrument. A similar situation would arise if
one had invested in tax-saving infrastructure bonds.
Most experts
recommend the same modes of investment year after year. However, there has to be
a rethink, given the change in the overall situation in the economy and capital
markets over the years.
The only way to build inflation-beating
portfolio returns, feel the experts, is by investing at least a part of the
investment portfolio in market-linked instruments. Market-linked instruments,
put in simple words, include those that dont guarantee returns. They come in
various garbs and they are either equity-oriented, debt-oriented or a
combination of the two.
The risk factor is that one might earn low
or even negative returns but the upside is that a slightly higher rate of return
can boost the overall portfolio. Some of them also get you tax benefits. Take,
for instance, ELSS or equity-linked saving schemes of mutual funds in which one
could invest up to Rs 100000.
Here, the equity-linked schemes invest
in stocks of companies up to 100% of the schemes portfolio and its returns have
been encouraging in the last three years.
Its compounded annualised
growth rate has been 48% in the last three years while for five years, it was
42%. An erstwhile investor in small saving schemes could consider investing a
part in ELSS, of course, to the extent one is comfortable with equities. method
would be through regular investment in a systematic investment plan (SIP).
For those who would also like to think about their retirement, there
are pension plans available from a couple of mutual funds. A few of the other
mutual fund schemes offer additional tax benefits. Investors have to be informed
about lockins and exit loads on premature withdrawal.
Unit-linked
plans of insurance companies are among the other market-linked instruments.
Today, many unitlinked plans offer different plans (read, asset allocation
mixes) which gets an investor tax benefits. The workings are similar to that of
mutual fund schemes in that the daily NAVs are reported. In the end, remember
the golden rule that market-linked instruments, while not guaranteeing returns
also has the potential to give better returns over the long-term.
Pick and choose the products of your choice — be it on the
debt or equity side — and accordingly, invest to diversify. It goes
without saying the overall asset allocation strategy should not at any point of
time be compromised.
1 =Poor, 3 =Average, 5 =Outstanding
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