Earning, saving and investing should
ideally be done simultaneously. But while most of us earn on a monthly basis,
investments tend to get postponed—often, to the last quarter of the financial
year (FY), and that too, to save on paying taxes. Since these are usually
last-minute and unplanned investments, it is likely that money is put into
products that may not be suitable. For instance, buying yet another insurance
policy, irrespective of adequate pre-existing coverage. For best results, it’s
important to ensure that both investing and tax planning are done in advance so
that only those products that are in line with an investor’s financial goals
are selected.
Why now?
The beginning of a financial year is an
ideal time for tax planning or to revisit the existing portfolio. “It gives an
investor the opportunity to correct her past financial mistakes or to begin
with a new approach to managing personal finances,” said Nitin B. Vyakaranam,
founder and chief executive officer, ArthaYantra, a personal finance advisory.
The two basic elements of analyzing a
portfolio at such a point are to look at the existing commitments, and to see
what effect changes in rules and regulations have on these. Besides that,
salary increments and bonuses are usually announced in the first quarter of an
FY. “This helps you plan cash flows more effectively as you have a better idea
of the amount of increase in salary,” said Varun Girilal, co-founder and
executive director, Mitraz Financial Services Pvt. Ltd.
Prior planning also means spreading the
investment plan to cover the year, which will reduce the burden of investing to
save on taxes in the last few months. “The habit of rushing at the last minute
to avail benefits does not work in the long term,” said Vyakaranam.
But before planning ahead, it’s best to
take a step back and see what’s already in your investment portfolio.
Existing portfolio
Before committing to further
investments, ensure that your previous ones are in line with your objectives.
“Check if the asset allocation still holds
true,” said Suresh Sadagopan, a Mumbai-based financial planner. For instance,
evaluate the debt-equity balance. Given that equity markets had a good run in
2014, some switching between assets classes may be needed to re-balance the
portfolio, so that it remains aligned to the goals.
The basic objective behind tracking a
mutual fund scheme, or any other product, is to see if the reasons for which
you had invested in it initially still hold. If the scheme has strayed from its
path, your goals could get affected. So, a decision has to be taken on whether
it stays or not.
Tax planning
After the evaluation of an existing
portfolio comes getting rid of non-performing investments, and rebalancing the
portfolio accordingly. If you find that existing investments exhaust your tax
benefit limits, then saving on taxes doesn’t have to drive your investment
planning. You could instead focus on, say, high-return instruments.
Minimum annual contribution is Rs.6,
000, and your money gets locked in till you turn 60. Under section 80CCD of the
income-tax Act, 10% of salary invested in NPS is eligible for a tax deduction
of up to Rs.1.5 lakh. This limit will go up by Rs.50, 000—taking the
total to Rs.2 lakh—once the finance bill is passed. Apart from this, if
your employer, too, chooses to contribute to your NPS account, then
contribution equal to 10% of your salary is deductible in your hands under
section 80CCD(2).
If you are a senior citizen, an
additional option is to invest in Senior Citizens’ saving
plans Scheme which will qualify under section 80C. Interest rate on this
has been raised for FY2015-16 from 9.2% to 9.3% per annum.
Other changes
There may be modifications to be considered
apart from those on tax benefits. For example, if you are considering fixed
deposits, look at the policy rate cuts by the Reserve Bank of India.
However, investment strategies also
depend upon time horizons. For short-term investment horizon, debt funds are
more suitable. For medium-term horizon, fixed maturity plans (FMP) of five-year
tenor and income funds are suitable. For longer term, equity exposure is advisable.
Before investing in FMPs, do note the
change in tax rules. “Debt fund-based investments have to be held for more than
three years (earlier one year) to qualify as long-term investment for tax
purpose,” said Girilal.
As the above mentioned examples show,
proper planning—be it to save on tax or for investing—helps you manage cash
flow for the entire year, and achieve financial goals in the long term.
[Source: http://www.livemint.com/Money/1t0jaLKjdGMfQRIPmqphDO/Plan-investments-for-the-new-financial-year.html]
