How to Plan Your Investing...!!

Many of us are so worried about the tax saving angle that we forget to look beyond it. In fact tax saving is only one aspect to consider while evaluating an investment. One need to consider all faces of investment. What are the different options you have got..??

Let's have a look at other aspect of our investment ..

The Returns from the Investment

• The amount of return from an investment is the single motivating factor you need to consider while choosing an investment channels.

• But keep this in mind, the tax saving is only for that financial year. However, the returns would impact you for the entire term of the investment..!! (point to ponder)

Scenario of Tax Saving FD vs Company Deposit

• Let's say : you Invest Rs. 20,000 in a tax saving FD that gives you an 8% return, or in a company deposit that gives you 11% return. The tax saving FD would save you Rs. 6,000 in income tax if you are in the 30% tax slab. 

• So, effectively you are investing only Rs. 14,000 to generate a return of Rs. 1,600 per year (8% of Rs. 20,000). So in effect, you are earning interest at the rate of 11.43%! 

• A company deposit doesn't save you any income tax, so the return from it remains 11%. Therefore, in this case, investing in the tax saving FD makes more sense.

Scenario of Infrastructure bonds vs Company Deposit

• An investment of Rs. 20,000 in infrastructure bonds would result in an effective investment of only Rs. 14,000, which would generate Rs. 1,200 per year (6% of Rs. 20,000). Thus, your effective rate of return is 8.57%. This is much lower than the company deposit! So even though a company deposit doesn't save you any income tax, investing in the company deposit is a better choice for you.

The bottom line......

• Evaluate the tax saving effect along with the potential returns to make the right investment decision.

Risk associated with the investment

• Ask this before investing - "Does the investment suit my risk profile?"

• For example, although Equity Linked Savings Scheme (ELSS) is a great tax saving channel, the returns from it are quite  effervescent  and uncertain making it a riskier investment compared to,stable investment like in Gold.

The bottom line....

• Take into consideration your risk appetite and the volatility of the investment before taking the enthusiastic attempt

Periodicity of the Returns

• How do you like your returns - periodically, or lump sum at the end of the investment? 

• For example, an investment in National Savings Certificate (NSC) is a tax saving avenue, but  all the interest is earned only when the NSC matures. So,if you are retired and need monthly interest income, an NSC many not be the right choice.

The bottom line....

• Match the nature of the returns with your needs while making an investment.

Tenure of the investment

• An investment whose duration is too long or too short may not be right for you. It should suit the time frame of your objectives.

• For example, Public Provident Fund (PPF) provides tax saving with  good returns, but it also has a lock in period of 15 years. If you are investing for your daughter's marriage that is just 6-7 years away, it is not the right investment avenue for you.

The bottom line....

• Make sure that the tenure of the investment you are considering aligns with the time frame of your financial goals.