Generating positive returns and building wealth is probably the aim of most investors. And a very important factor in generating returns is the investment tenure. The time frame of your investment has significant impacts. Whether it is a short-term investment of 2 to 3 years, or a long term one with tenure of 10 years, your returns are never the same.
This is especially true when we consider the post-tax yield vis-à-vis the pre-tax. Hence tax efficiency plays a key role in deciding most investment aspects for an individual.
Time for Tax Saving Investments:
Section 80C is one of the most important legal sections for taxpayers. It helps in reducing the taxable income by 1.5 lakhs INR every year. However, this mandatory investment should not be done in a hurry. On the other hand, each and investment should actually be evaluated on the basis of 3Rs (Risk, Return and Resolute) and 3Cs (Consistent, Composite and Core Objective). These enable you to make the right decision before investing.
Let us consider the 3Rs:
Each and every investment has an inherent risk associated with it and that needs to be evaluated well before investing. Some investments like real estate have liquidity risk and PPF has interest rate risk while equity has market risk; bank FDs have reinvestment risk, while commercial deposits have credit rate risk. There are multiple types of risks and each and every aspect needs to be considered well before finalizing the same.
More often than not, only market risks are considered and other risks are conveniently ignored. However, as a prudent investor, all factors and aspects need to be considered and then chosen.
This is one of the key parameters of choice and hence a post-tax annualised yield needs to be considered for real impact. Returns do not make any sense if taxation is not considered.
Since investment is long term, resolute or determined investment decisions need to be taken right from the word go. Saving taxes is just a by-product of the investment and should not become the basic purpose. If investments are done in a definitive manner, even your mandatory 80C corpus would surprise you leaps and bounds after retirement!
Now, let us consider the 3Cs:
Deciding the core objective of choosing your investments is integral as it will shape your financial plan. The financial goals along with the objective of the overall portfolio needs to be determined along with the tenure, risk appetite, etc. Choosing the product should actually be the last thing on your mind, as it is the means to the end and not the end.
So, defining your core objective for investing is of utmost importance and then reviewing the same periodically as well.
Investments should be consistent. Even for the tax saving ones, at least Rs 1.5 lakhs if diligently invested every year can make a serious difference in the overall portfolio.
Also, while investing each investment should be consistent with the core objective of the portfolio and should fall in line accordingly.
Only when a combination of all the factors of investment is considered and then your mandatory tax saving investments are done in a composite manner, the entire wealth building activity looks complete through the 80C route!
So, this year, for every investment that you may opt for, be it Bank FD or PPF or ULIP or ELSS, make sure you consider the 3Rs and the 3Cs before deciding. This is not only help you choose but justify the same when you re-evaluate your portfolio the next year for a review!
Do let me know if there are any questions that you may have or how to go about considering the 3Rs and the 3Cs for your choice of investment, and we will be happy to help you out.