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Getting Tax Savvy

Getting Tax Savvy

If you have still not completed your tax planning for the current financial year, you really do not have much time left. But in a hurry to get things done, do try and steer clear of the new offerings, of which there are plenty.

Since December 2008, a number of new Equity Linked Saving Schemes (ELSS) have hit the market - IDFC Tax Advantage Fund, Quantum Tax Savings Fund, Bharti AXA Tax Advantage Fund and JP Morgan Tax Advantage Fund. All these have the 3-year mandatory lock-in period.

Then there is the DBS Chola Tax Advantage Fund Series 1 which is a 10-year, close-ended scheme.  To add to the variety, there is the Tata Infrastructure Tax Saving Fund, another 10-year close-ended fund with a thematic bent – infrastructure. Investors investing in these 10-year, close ended funds can exit anytime after the mandatory lock in of 3 years. But purchases can only be made during the NFO period.

Here are a few guidelines to help you make the right pick.

Get the asset allocation right

Look at your tax allocation in conjunction with your overall asset allocation. After all, the tax planning avenues are either equity or debt. So when you decide on a debt allocation, ensure that it is not only an income fund that you are referring to but also fixed-income investments which are part of your tax planning.

Your first step would be to look at Section 80C. Under this section, the fixed return options are the Public Provident Fund (PPF), Employees Provident Fund (EPF), National Savings Certificate (NSC), 5-year fixed deposits with banks or post offices. The only equity option available is an ELSS. If you invest in a tax saving fund, ensure that it falls under your overall equity allocation. Do remember that investments in pension plans (UTI Retirement Benefit Pension Plan, Templeton India Pension Plan) have an equity and debt allocation.

Get the diversification right

An equity portfolio must have a few core holdings which form the bulk of the portfolio. In other words, these must be funds that can do the heavy lifting in your portfolio. Stick to diversified equity funds that have had a good track record over a number of years.

Once a solid core is in place, you can add thematic, sector, global, gold, mid-, or small-cap funds to provide for that extra diversification or alpha to the portfolio. But all these holdings will be periphery. They will only supplement the core portfolio, not supplant.

Which brings us to the question: Can an ELSS be a core holding?
Certainly. There are a number of tax saving funds that have done tremendously well and have every right to fall under the core category. They are amply diversified and have proved their worth in various market conditions.

Should you pick up a new ELSS? We have never recommended new funds and the same holds here too. Avoid a brand new ELSS when there are other proven funds that you can opt for.

Should you invest in a thematic ELSS?  Right now, there is only one - Tata Infrastructure Tax Saving Fund. Even if the theme still holds appeal, take a look at your current portfolio. Do you have any funds which have an infrastructure tilt? If yes, then you certainly do not need another. And if you still believe that the infrastructure theme has steam left in it, there are a number of specialised infrastructure schemes to pick from. Ironically, Tata Infrastructure Fund itself is a good option.