Tax Relief Today, Savings Crisis Tomorrow?

How much has tax-saving driven investor discipline, and what could sustain it without these benefits?

It has little to do with the history of mutual funds and more to do with the Indian savings psyche. Most people are taught at home to save. What you do with that saving is another story - whether you put it in the locker, keep it in the bank, etc. And going by the tax-saving funds, this is a relatively new phenomenon. It became possible only from 2005. Before that, the maximum you could invest in a tax-saving fund to get the Section 80C benefit (erstwhile called Section 88A) was only Rs 10,000.

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So, in the '90s or early 2000s, the Rs 10,000 investment that I made and still hold, I find them to be magical. That's simply because I've held them for 30 years. In fact, the secret lies in the years, not just in equity. And then, there was no other simple equity investment available. There was another charm of these equity investments in the tax-saving fund: One is that investors used to get excited about equity once in a while.

Every few years, they would get excited - like in 1992, 1999, 2006, or 2007. And when investors get excited, they invest anywhere. They would normally get excited when everyone seems to be making money, and they feel they're missing the bus. In that situation, what happens is that you invest at an inopportune time, lose money, and then take it out. This leaves a permanent embedding in your mind: investing in equity means losing money. It becomes a nasty place to be.

What the tax-saving funds did was put a lock-in period in place. Not taking your money out for three years actually changes the whole complexion of your experience. Your experience improves. The worst case is that you earn a little less or as much as the PPF, but the best-case scenario is that you invest for three years, it does well, and you keep holding it for a long time. Then, it turns out to be very rewarding.

Tax-saving funds were a huge catalyst because savings and investment were not in question for Indians. What these funds enabled was savings, investment, compounding at a higher rate, and keeping investors invested. That, I think, was quite useful, and it has been a gateway investment for most Indian investors into the equity market. This has also been a pleasant experience.

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What are the alternative investment strategies that can keep people committed to long-term investing?

There are broadly three kinds of people in terms of behaviour towards financial products or investments, or long-term investments. One is that there are people who will save, irrespective of whether they have to save taxes or not. They will save, and they will invest. On the other extreme are the people who will earn whatever, but their needs are so much that they will borrow future income to spend. Then, there is a third person who doesn't have the resources but earns, and spends on essentials. If he were forced to invest, knowing it would get him some tax-saving benefit, he wouldn't be able to. That kind of person would be left out.

But there are ways. These things keep changing; they are not static. In the initial phases, you may not have savings, but subsequently, you might have. In that situation, people need to do two or three things. One is to think of your important long-term goals. The government has given you flexibility - earn and do whatever you want till you are earning Rs 12 lakh a year. But you have to worry about your own future. Your child will get into college, and you will think about buying a house. So, when do you plan to achieve these goals? Just put those numbers alongside them and have some framework.

You can come to Value Research Online, look at our goal planner, and check how much money you need and how much you need to save for it. Having this in the back of your mind will keep you on track. You don't need a framework; you just need extreme discipline when your current needs are competing with saving for important future goals. If you don't save, you won't have it.

So, sensitivity to important goals and working towards them, and reminding yourself every year what you're working towards, is key.

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How can investors balance lifestyle spending with long-term financial security?

Life is all about balancing. In that sense, you will have to find a way, but at the same time, I think what I said is important: Just being sensitive to your important goals - your child's education, buying a home, your retirement - these are not negotiable goals. If you don't have context for how much you will need or when you will need it, how much will be enough, you'll end up working for many years toward these goals. It may not require a lot of money, but it will require discipline, habit and orientation. So, develop that sensitivity.

After that, there's really only one thing: The temptation to borrow money and spend it right now is strong, and it's readily available. It hasn't always been like this. So, not being impulsive about big spending is key.

That's actually the ploy the financial industry uses to make you spend all your money - and not just the money you have, but the money you'll earn in the future as well. Ask yourself, what is the worth of this spending? How crucial is it? Only in the initial stages does this matter because developing that understanding - what the worth of this spending is and what its equivalent in future savings - will help you avoid regret.

So just be sensitive to it, ask the right questions, and once you've figured out the margin, spending is not all that bad. It's just about striking the right balance.

Suggested read: The power of the investing habit

What immediate steps or tools can investors use to future-proof their finances as tax-saving instruments lose relevance?

First, form your habit. The government is getting out of your life, and that's a good thing. Previously, the government forced you to invest in certain places. Now, you have the freedom, but you must take responsibility for your goals yourself.

Second, do the planning. Know how much you'll need for your important goals. Without some framework, it will feel like you don't have the money when you need it. This will leave you in a tough spot.

Third, automate it. The good thing is, you don't need to go anywhere. If you have a smartphone, internet connectivity, your Aadhaar card, PAN number, and online bank access, you're all set. You can do it yourself, any day, seamlessly, and in just 15 minutes. SIP is magica because it automates the process. You just set a standing instruction to take, say, Rs 30,000 from your bank account every month, and it happens. You can automate it so that the money is taken before you can start spending it. If the money sits in your account, it's mere accessibility will tempt you to spend it.

If you do these two or three things - sensitise yourself, form the habit and automate - it's only a matter of time before you look back after 3 years and see how it has grown. You won't need persuasion because the impact on your mind will be clear. You will see how your Rs 5,000-1,80,000 has grown into a substantial sum. That's the magic. Once you're sold on the concept and see the results, despite market fluctuations, you won't need any nudging from the government.

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Viewer's Question

I have to achieve a target of Rs 1 crore in 5 years. I can shell out up to Rs 1.5 lakh per month as SIP. Which fund category should I choose in this case? - Ravi

He can accumulate Rs 1 crore over the next 5 years by putting Rs 1.5 lakh every month, even earning just 4.5 per cent or around 4.25 per cent. He doesn't need to take much market risk and invest in a very conservative fund to achieve this. However, I would urge him that if this is a negotiable goal, then he should take some measured risk. By "measured risk," I mean taking chances with funds that are a little more volatile but where he has the potential to accumulate something very meaningful.

If he invests in a balanced fund or an aggressive hybrid fund, which is relatively stable over five years, with a little flexibility, he can accumulate more than Rs 1 crore. Even if he earns only 2-3 per cent more than the long-term average from equity markets, he could end up with Rs 1.25 crore to Rs 1.5 crore.

Also read: Tax incentives: A debate on habit formation

This article was originally published on February 14, 2025.