In the long run, these assets also create wealth as average yearly returns are higher than comparable assets

 

Two weeks from now, we would be entering the crucial January-February-March (JFM) months, the time when a large number of taxpayers rush to complete their investments which would lessen their tax burden for the current fis cal. Although ideally tax planning and tax-related investments should b done right from the be ginning of the financia year, but often people kee it pending for the majo part of the year and rush in to invest only when it becomes urgent during th last few months.

Financial planners an advisors suggest that tw popular and easy to un derstand products whic are also rewarding in lon term could be used to effi ciently meet the obliga tions for tax related in vestments which will lessen the tax burden of individual taxpayers These are equity linked savings schemes (ELSS) floated by mutual funds and the public provident fund (PPF), which is man aged by the government PPF has a 15-year lock-in from the year you start in vesting while ELSS has a three-year lock-in for each individual investment.

Depending upon the age of the investor, he advises them to invest in ELSS and PPF in a particular ration. If the tax payer is an young individual, I suggest 30% of the in vestible corpus to go into PPF and the balance 70% in ELSS. On the other hand, if the tax payer is a 50 year old individual, I suggest him to divide the total investment corpus equally. I usually follow the rule that says that the percentage of investment into equity should be 100 minus your age, and the balance into debt.

The advan tages of such a mix are manifold. For one, both of fers tax ad vantages under t h e cur rent taxa tion rules. Both the investments also help in building capital in the long run. In the long run, while the in vestment in PPF gives the stability to the port folio, ELSS helps in capital building. This also helps in asset allocation in a very efficient manner. And all the returns are tax free in the long run.

Even If done for the purpose of saving taxes, there should be a goal for which the investment is be ing made. In other words tax saving itself should never be an objective to in vest. Dalal, who also ad vises his clients on investment related matters, prefers a combination of ELSS and PPF for saving taxes, although he believes that in the last few years, since the time government linked the rate of returns in PPF to 10-year government bonds, PPF has become slightly less lucrative an investment than earlier.

ELSS has given an average annual return of 15%, which is very good. Even going forward, 15% CAGR (compounded annual growth rate) in ELSS is very much possible. On top of it, one could also enjoy the tax advantages. In the long run, equity usually outperforms debt and so the three year lock-in in ELSS for saving taxes is a blessings in disguise.

If someone is for the long term, ELSS should be the top priority. If the investor is conservative and risk averse in nature, then I would suggest him to invest more in PPF, because unlike equities this is not a volatile investment.

According to fund industry officials, a systematic investment plan (SIP) in an ELSS can take care of investors' need for regular and disciplined savings that also allows himher the option to lessen their tax burden. In addition, investing through ELSS also allows investors to build wealth over the long run and volatility, that is usually associated with equities, also reduces if one is willing to stay invested over the long run, that is 10, 15 or 20 years.