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Getting jitters about tax planning now that March 31st is just three months away? Well, there are several mutual funds offered by companies like Fidelity, ABN Amro, Prudenticial ICICI, HDFC, Reliance and Tata for instance, which can help you out.
And with the government announcing that investments up to Rs 1 lakh in open-ended ELSS funds are eligible for tax benefits under Section 80C (Income Tax Act, 1961), mutual funds alone can take care of most of your worry.
You can check out Fidelity Tax Advantage Fund - an Equity Linked Savings Scheme by Fidelity Fund Management that was launched on January 5, and has a lock-in period of three years like any other ELSS.
According to Ashu Suyash, country head of Fidelity's asset management company in India, the three-year lock-in period helps the fund manager devote a larger portion of the portfolio to stocks that have the potential to perform better over a longer term.
"We are happy to offer a Systematic Investment Plan to investors who are looking for a tax break as an easy and affordable way to take advantage of the growth potential of equity funds," says Suyash.
Equity funds played a major role in 2005, with some like HDFC Taxsaver, Magnum Taxgain and Magnum Emerging Business far outperforming the market, which grew by around 50 per cent. Portfolio managers also suggest ELSS as one of the best options.
"Historically, as in the current scenario, investment in equity markets continue to be the best way of creating wealth in the long term," says Ashish Kapur, CEO, Delhi-based Investshoppe. But since it is difficult for many retail investors to monitor investments, he suggests the MF route.
The advantage of MFs is that with a single investment of as low as Rs 5,000 you can be a part of a portfolio that comprises around 25 carefully monitored stocks.
And Sushil Muhnot, MD & CEO of IDBI Capital, hints that the choice of which MF to pick is not very difficult, "If you look at the top 5-7 mutual funds over last five years you will find that they have generated similar returns," he says.
On whether one should pick up an equity-linked MF or debt-related MF, Muhnot suggests: "The rule of thumb is to subtract your age from 100 and invest the percentage equal to that number in equity and the rest in debt. So someone who is 30 years old can invest over 70 per cent in equities."
Kapur says debt funds are better if one is worried about short and medium term stock market volatility. Experts, therefore, recommend income funds for medium term needs (1 to 3 years) and floating rate (3 months to 1 year) and liquid funds for short term needs (less than 3 months).
If you cannot shell out a decent amount at once, go for a Systematic Investment Plan with investments at regular intervals, for instance monthly or quarterly. "An SIP should always be the preferred option as it takes away the risk of trying to time the market and is convenient," says Muhnot.
With the existing tax structure, Muhnot also suggests life insurance and health insurance as good substitutes for MFs; but he cautions that one should buy a product for its core value. "Buy term insurance for risk cover and mutual funds for returns," he says.
Also, check out ICICI Lombard's 10K Tax Saver Health Insurance. According to the company, it gets health insurance policy costing Rs 10,000 for the effective cost of just Rs 6,634 at the highest tax slab and maximum income tax benefit under section 80D of the Income Tax Act. It also offers a single floater health cover for the entire family. The plan is only available online at the company website.
Ritesh Kumar, head, Reinsurance and Bancassurance, ICICI Lombard General Insurance Company says: "Our 10K Tax Saver Health Insurance plan is a unique cover that offers the twin benefits of saving the maximum income tax and providing comprehensive health cover to the family against any unforeseen medical expenses."
According to experts, Unit Linked Insurance Plans are the best and also offer flexibility. "These policies allow you to choose between different funds, based on each individual's profile and financial goals. Thus, they allow you to have an asset allocation as per your needs," says Kapur.
Besides the above, there are Small Savings Instruments like PPF, RBI Relief Bonds, Post Office Time Deposits and National Saving Certificates. However, most of these have lost their sheen due to the successive fall in interest rates.
"I still prefer PPF as it gives me a fixed rate of return," says Jayant Bose, a graphic designer, who also finds PPF the most stable instrument. Currently, PPF has a return of 8.5 percent tax free with a 15 year lock-in. The maximum you can deposit in one in a financial year is Rs 70,000.
So, what's your choice of investment?