Rating the Most Popular Tax saving investments
Wiremesh – Jan 10th, 2018
#ELSS #80cc #taxsavers #taxsavingideas #NPS #PPF #ULIP #insurance
People are scrambling to invest in tax saving schemes. The cut of date for investment proofs is looming and at the same time they are receiving contrary advise as to which would be the best tax saving instrument. The banker say invest in insurance, dad says invest in pension schemes where as a friend say ELSS is the best.
Wiremesh will Rank the favorite tax savings instruments out there to clear this dilemma (5 is the highest ranking, 1 being the lowest)
1. ELSS – Average 2 Year Return: 18.6%
Top rated Funds 2 Year Return :+22%
Ranking – 5
Equities have gone from strength to strength in the last one year. The average yearly return in this category is @34%. From a 5 year perspective the average returns are @ 13%. These are just the average returns the top 5 funds in the category will be around +19% for the 5 year term. The icing on the cake is that these returns are completely tax free.
Though they offer the same tax benefits, not all ELSS funds are the same. Choose a fund based on your risk appetite.
Investors also need to understand that Markets are at all time high and equities will keep going up and down. The new investors need to adjust their expectations on potential returns from a short term horizon. Try not to do one time investments in funds when the markets are at their highs. SIP is the best route to adopt
2. ULIPs – Average 5 Year Return: 12%
(Take it for a +7 year horizon)
Ranking – 4
The 3 biggest issues with ULIP’s are perception, perception & perception
Most financial planners hold ULIP’s in contempt. People are guided by their past experiences where they have seen ULIP’s underperform primarily due to high cost and also because they are not actively managed.
The fact is the best ULIP’s launched post 2014 has very low cost associated with them. The cost keeps coming down as the tenure of the ULIP increases. In fact some of the ULIP’s are capable of beating MF;s on cost post the 7th year.
You have to keep in mind that ULIP’s also offer life cover and this does add to the cost. If someone has a yearly premium of 5 lakhs the life cover offered is between 50 to 65 lakhs. This is substantial. ULIP’s have an substantial inbuilt advantage over MF;s – it’s called free switching of funds. Less than 2% of the investors use it as there is no one there to guide them including so called :financial planners”
For the Ulips to work make sure you actively manage them and your minimum investment horizon to gain maximum advantage on cost is +7 years. If you do this ULIP’s could provide some serious arsenal in your investment portfolio
3. National Pension Scheme – Average 3Year Return: 9.5%
Ranking – 2.5
NPS offers additional deduction of up to Rs 50,000 under Sec 80CCD (1b) & if the employer puts up to 10% of the basic salary of the individual in the NPS, that amount will not be taxable. These features have attracted investors. For me the biggest issue with NPS is that only 40% of the corpus is tax free on maturity. Also, on maturity, the NPS forces the investor to put 40% of the corpus in an annuity to earn a monthly pension. This pension is treated as income and is fully taxable. There is also the lock in period which prevents withdrawal before retirement. For me te tax implications are a deal breaker
4. Public Provident Fund – Average 1Year Return: 7.6%
Ranking – 3
PPF is a viable option for people who want to complete avoid equity investments in any form
Small savings rates are linked to the government bond yields in the secondary market. PPF rates have progressively come down in the past two years, mirroring the decline in bond yields. The PPF rate was cut recently by 20 basis points and could fall further in the coming months. Despite the rate cut, advisers say the PPF remains a good bet because the interest is tax free. The tax-free status of the PPF gives it a distinct advantage over fixed deposits. The interest from fixed deposits is fully taxable, which brings down the returns to barely 5% in the highest bracket. Besides the returns and taxability, the PPF scores high on safety, flexibility and ease of investment. An account can be opened in a Post Office branch or designated branches of PSU banks. Some private banks also offer the facility to invest in the PPF. Opt for a bank that allows online access to the PPF account. Deposits can be made throughout the year, but an investor must deposit at least Rs 500 in a year.
5. Traditional Life Insurance – Average Return: 4.5% – 5.5%
Ranking – 1
Surprised by the ranking? More than 80% of investments are done in traditional life insurance policies. These policies have very high cost, offer very low returns and negligible life cover. Most of the investors get swayed because these policies quote a high maturity figure for even higher time duration. What people don’t realise is how inflation eats into the numbers quoted. Please do your self a favor and buy a term plan to cover your insurance needs
Stay Informed, Invest Wisely