Right taxsavers: Align choice with risk appetite, asset allocation & goals

With 13 days left to make tax-saving investments for 2024-25, investors face numerous options and the pressure of an impending deadline. Salespersons’ aggressive tactics further compound their difficulties.

 

Key considerations

 

Risk appetite: Different tax-saving instruments carry varying levels of risk. “Low-risk options include Public Provident Fund (PPF), Employees Provident Fund (EPF), tax-saving fixed deposits, and Sukanya Samriddhi Yojana, which provide stable but moderate returns,” says Suresh Surana, a Mumbai-based chartered accountant.

 

Unit linked insurance plans (Ulips) and the National Pension System (NPS) can have varied risk levels, depending on their equity-debt mix. Equity-linked savings schemes (ELSS) are completely equity-oriented.

 

“While they have the potential to offer double-digit returns over the long term, they carry higher risk. They are suitable for investors with a high risk appetite,” says Mohit Gang, co-founder and chief executive officer, Moneyfront.

 

Age: Younger investors can take more risk. “Young professionals might allocate heavily towards ELSS for their growth potential and higher returns. Those closer to retirement might prefer low-risk options like PPF or fixed deposits,” says Shefali Mundra, tax expert, ClearTax.

 

Asset allocation: It refers to the percentage of portfolio allocated to various asset classes: equity, debt, etc. Asset allocation must align with age and risk tolerance. “Investors with a higher risk appetite may prefer higher allocation to equity-based tax-saving options. Those with a moderate risk appetite may opt for a balanced mix of equity and debt. Conservative investors may allocate more to fixed income,” says Surana.

 

Existing asset allocation also matters. Investors overweight on equities may make incremental investments in fixed income, and vice versa.

 

Lock-in period: It varies across instruments. “PPF comes with a 15-year lock-in, tax-saving fixed deposits have a five-year lock-in, while NPS locks in funds until the investor reaches 60 years of age. ELSS has the shortest lock-in of three years,” says Gang.

 

Investors must factor in their liquidity needs. “If an investor needs liquidity for an important goal in two years, investing in a tax-saving product with a minimum lock-in of three years would not be beneficial,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

Surana adds that lock-in may not matter to those with long-term goals like retirement.

 

Return potential: ELSS can yield 10-15 per cent annual returns over the long term. Ulips, depending on asset allocation, can yield 6-12 per cent. “PPF currently offers 7.1 per cent, EPF 8.25 per cent, while tax-saving fixed deposits offer 6-8 per cent per annum,” says Surana.

 

Mistakes to avoid

 

Last-minute investment decisions tend to be poorly researched. “Investors often ignore the risk profile and liquidity of instruments,” says Mundra.

 

Kumar points out that investors often choose instruments for immediate tax benefits, whereas they should ideally align with long-term financial objectives.

 

Mis-selling is rampant during this period. Kumar warns that agents and distributors often prioritise commission-generating products over those that benefit investors.

 

“Be wary of high-pressure sales tactics promising unrealistically high returns. Conduct thorough research on the product’s benefits and risks. Seek advice from qualified financial advisers,” says Mundra.