As we approach the tax season, it is about time to explore our tax saving options. The normal tendency is to leave everything until five minutes before the deadline. This may be psychologically understandable but not that sensible. Broadly, there are three choices. The fixed-income options like the PPF and NSC and tax saving bonds which yield 9 to 9.5%, the Balanced options (equity and debt) which include the pension plans of UTI and Pioneer ITI Pension Plan, and the Growth, the equity linked savings scheme of mutual funds.
You can invest up to Rs. 60,000 in the fixed income (PPF and NSC) and the pension plans, while the available limit for tax-saving equity fund is Rs. 10,000 only. Investment in the fixed income options has to be for a minimum period of 5-years while the pension plans and ELSS schemes have a lock-in period of 3-years. All these investment entail a tax rebate of 20%. However, the rebate is higher at 30% for investors with an annual income of upto Rs. one lakh.
Why Invest in ELSS? There are two simple reasons why you must invest in tax saving equity fund. One, the rate on fixed income options has fallen sharply in recent. Two, equities prove to be the best performing long-term asset class hence will prove to be the best hedge against inflation.
If you want to convert your tax-saving investments into a sizeable nest egg, consider a long-term investment in the tax-saving equity fund and look beyond three-year lock-in. Besides, the tax-saving equity funds also facilitate regular investment -- every month or quarter, rather than a wait till end. March may not be the worst time of the year to invest but there is no reason to believe it is the best. Besides, we get our salaries in installments, we buy on installments and it is very convenient to save in installments.
While investing a lump sum at the most opportune time can potentially profit you more than if you rupee cost average your investment, but defining "opportune" is difficult for even the most seasoned experts. As a long-term strategy, you may find regular investment to be more appropriate to help maximize returns, lower your average cost per share, and allow you to feel more comfortable during uncertain markets knowing that you make sound investment decisions. A small monthly saving of Rs. 830 amounts to Rs. 10000 in a year. An investment of Rs. 10,000 may look like small savings but with your disciplined and regular savings, you can well turn it into a sizeable nest egg. Take your pick from the well-diversified tax saving fund, think long-term and follow a disciplined strategy to invest regularly and stay invested to build wealth.
My take among tax savers include Zurich India Tax Saver '96 and Franklin India Index Tax Fund for steady growth and Alliance Capital Tax Relief and Pioneer ITI Taxshield for aggressive growth.
Fund Update: During the week, the market lost 45 points on the Sensex and 11 points on the NSE Nifty. The key gainers during the week were -- JM Basic (7.43%), Birla MNC (.73%), Magnum Contra (.7%), Zurich India Capital Builder (.52%). The losers -- Magnum Global (-5.65%), Magnum Multiplier Plus (-4.9%), DSPML Opportunities (-4.12%) and Magnum FMCG (-3.88%).