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Business News/ Money / Personal Finance/  Opinion | Go for the right mix of debt, equity and insurance

Opinion | Go for the right mix of debt, equity and insurance

Choose a mix of products that can give better compounding over longer periods

The crux of a tax savings portfolio is compounding over long years. (Mint)Premium
The crux of a tax savings portfolio is compounding over long years. (Mint)

It is that time of the year when everybody is in a hurry to do tax investments. There are tax-saving benefits that need to be availed in good time and documented with employers. If you are salaried, the usual trigger is a mail from your employer’s HR cell seeking out details of your tax-saving investments. There inevitably would be a deadline after which a deduction from your salary hangs like the sword of Damocles. Saving tax is something mostly done on mission mode like in an emergency.

A typical reaction would be to hastily take stock of whatever tax-saving investments or insurance plans that are running, and then arrive at how much more needs to be invested to avoid paying tax. Swiftly, you decide on the first available investment option and don’t want to spend too much time finding the best option. It would suffice if you avert the salary deduction in March.

Then, the rush begins to find the money to be put away into a tax-saving scheme. Often, there won’t be enough money on tap. You quickly identify the investments which you did earlier that are free to be redeemed. Recycling is a ready-made solution. So, you take money out of an existing tax-saving investment like an equity-linked savings scheme (ELSS) and put the money back again into the same thing. Often, you seek out your relationship manager in the bank or are sought out by him to quickly find “some investment" that saves taxes. A unit-linked insurance plan (Ulip) or just “some insurance policy" would be immediately identified, an explanatory mail exchanged, and a hurried investment executed. Once this happens, you forward all the details to your HR and breathe easy. Another year of tax savings passes on.

This story could be typical. But this type of investing is a fundamental mistake. When you recycle savings, you work against the very idea of tax saving and lose the opportunity to create something tangible.

While saving tax is important, ensuring that you follow a proper investment approach is critical. This will change your perception and turn tax-saving into a powerful wealth creation strategy. Your-tax saving investments can be used smartly to create many financial solutions for later years, and could perform different roles at different stages of your life. The key is to combine tax savings and long-term savings to meet your long-term financial goals.

Another common mistake is restricting returns. There are a wide variety of investment options available to save tax with varying return profiles. It is important to choose a mix of products which can provide better overall compounding over longer periods. Avoiding low-return products, choosing products that match your risk appetite and taking risks that match your risk profile are very important. A simple solution is to take a portfolio approach to tax savings. ELSS, Public Provident Fund (PPF) and term insurance are three must-haves in your tax-saving portfolio. Ulips, endowment plans and money-back plans should be taken only if they really suit your financial goals and risk profile.

The crux of a tax savings portfolio is compounding over long years. And, we should not disturb this compounding. By making sensible tax-saving investments, keeping tax-saving as a separate portfolio, and helping this portfolio grow for a period of 15 years, you can accomplish significant fulfilment of your financial goals. Smart product choices, extended investment horizon, disciplined investment management and regular review will make your tax savings deliver the intended benefits and much more.

What you should remember is that the product options available for tax savings are far too many. Over time, successive governments have expanded the options causing a problem of plenty. This can become too confusing and directionless. The key is to simplify and structure your product choices. This would essentially mean eliminating most choices. You need to create the right mix of debt, equity and insurance. A smart aligned advisor can truly add value to these choices, create a strategy and enable long-term wealth creation.

Shyam Sekhar is chief ideator and founder, iThought

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Published: 28 Jan 2019, 06:06 PM IST
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