Tax-saving strategy; spotting mis-selling: Top personal finance stories

This week we explain what a tax-saving investment must do and how to read the fine print of pension plans

The bulk of tax-saving investments occur during the final quarter of the financial year. In this week’s lead article, Sanjay Kumar Singh and Karthik Jerome emphasise the importance of aligning your tax-saving investments with your overall financial objectives, asset allocation strategy, and liquidity needs. They also delve into the right products to use and the ones to stay clear of.

Deferred annuity plans are useful products: Invest now and receive a regular income stream in retirement. However, these products are sometimes subject to mis-selling. Deepesh Raghaw, a Sebi-registered investment advisor, sheds light on how this mis-selling occurs and highlights the key aspects one should be vigilant about.

A severe illness can have a devastating effect on your finances. To protect yourself from such an eventuality, invest in a health insurance cover. For those seeking a plan, Policybazaar.com offers a comprehensive table of plans having a sum insured of Rs 10 lakh for 30-year-olds.

Those seeking a debt fund that invests at least 80 per cent of its portfolio in the highest-rated papers should opt for a corporate bond fund. Look up Morningstar’s review of HDFC Corporate Bond Fund, which enjoys a four-star rating.

Number of the week

60 per cent: Retail investors’ share in mutual fund AUM

Retail investors’ share in total assets under management (AUM) of mutual funds went past 60 per cent for the first time in December 2023. This happened because of the rally in the equity markets and strong flows from retail investors into equity schemes. In June 2020, retail and institutional investors had a 50 per cent share each of the total AUM.

Another reason for retail dominance is outflows from debt mutual funds amid low returns and changes in tax norms (indexation benefit on long-term capital gains was taken away and all gains from these funds are now taxed at slab rate). Debt mutual funds derived the bulk of their flows from institutions. Investors have pulled out Rs 3 trillion from debt funds over the past three calendar years (2021 to 2023).

Now that retail investors have taken to mutual funds in a big way, they should focus on developing an asset-allocated portfolio with allocation to all three major asset classes: equity, debt and gold. Within equity, they should diversify their holdings across large, mid and small-cap funds. They should also have exposure to international funds for geographical diversification within their portfolios.

Within debt, investors should have the bulk of their money in less volatile shorter-duration funds (with a portfolio duration of up to one year). The choice of fund category should align with their investment horizon. Limited exposure should be taken to long-duration funds, which can offer capital gains if rates are cut this year but can also be volatile. Similarly, exposure to credit risk funds should be limited, based on risk appetite.

When investing in gold, long-term investment should be done via sovereign gold bonds while shorter-term investment should be done via gold exchange-traded funds, which offer easy liquidity.