Before investing in tax-saving instruments, consider how much tax you will be saving
I am 23 years old and I want to invest in mutual funds through systematic investment plans (SIPs). My monthly salary is about Rs23,000. Recently, I have started investing Rs2,000 in a tax saving scheme—regular growth—of the State Bank on India. Can you please suggest some other mutual funds as well to diversify my portfolio? I want to invest Rs6,000 a month.
If you invest Rs2,000 a month in a tax saving fund, your annual investment would be Rs24,000.
Please ensure that this amount is required for you to claim 80C deductions to reduce your tax liability, and adjust the investment as needed.
Given your salary, you may at best be saving Rs1,300 a year in taxes by making this investment. So, if you’d like to add to your portfolio, I would suggest non-tax saving funds which do not have any lock-in period (tax-saving funds carry a lock-in of 3 years).
For the extra Rs4,000, you can invest in a balanced fund such as ICICI Prudential Balanced Fund (Rs2,000), and a large-cap fund such as Franklin India Blue-chip Fund.
I wish to replace my fixed deposits (FDs) in my bank with tax-efficient investment instruments. My current yield on such FDs, pre-tax, is 6.86% and post tax it is 4.73%.
I need the money as margin for house purchase in 2020. Should I opt for ultra short-term funds or dynamic bond funds? The downside is significant reduction in indexation benefit due to lower cost inflation index (CII). The second alternative is to go with arbitrage funds. My return expectation is at least 7% post tax. However, my consideration is falling in arbitrage funds due to excess liquidity chasing limited opportunities. Or I could opt for equity saving funds considering next 3 years’ horizon. But the downside is that 30% is always at risk of capital loss. What should be the best alternative?
Given your time frame of investment, the best you can hope for is a return that beats fixed deposit rates on post-tax basis.
Your analysis of the different options available is spot-on in terms of relative merits and demerits. However, you do not need to take just one of these options—you can go with a combination.
My suggestion would be to go with pure debt funds (similar to your first alternative) for the bulk of your investment, and take on some equity savings fund (your third alternative) for the rest.
You can invest 70% of your funds in a couple of short-term debt funds such as HDFC Regular Savings Fund and UTI Short-term Income Fund. The remaining 30% could go to an equity savings fund—Kotak Equity Savings Fund.
However, please note that the equity savings fund would have some unhedged equity part in their portfolio, which would be subject to market risk. But, given the 3-year time frame of your investment and considering the small percentage (about 30%) of allocation to equity in the fund’s portfolio, the overall impact on your portfolio returns, if on the downside, would be minimal.
Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com.
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