The annual ritual of tax-saving

It is that time of the year when the most mundane exercise of all - tax saving under Section 80C of the Income-Tax Act – needs to be undertaken. Most employees loathe the last four months of every financial year - December to March – when all employees get the ‘last reminder’ from the accounts department to submit proof of having invested in tax-saving instruments under Section 80C. There is a last minute scramble to meet the deadline.

People often confuse tax-saving with financial planning (or rather, saving for a financially secure future). In reality, the two are quite unrelated. Tax-saving should fit into your overall, larger scheme of ensuring a financially secure future for yourself and your family. Therefore, investments in tax-saving instruments should never be undertaken haphazardly. These investments need to fit into your overall financial plan. In order to accomplish that, we need to pick tax-saving instruments with care. People rarely share the same perspective on tax-saving.

Common mistakes

Here are some common perceptions and mistakes of investors:

I. 80C Limit - Current policy = New policy: The most common ‘mistake’ is to take the prescribed limit (Rs 1 lakh currently), subtract current investments and put the balance into another insurance policy.
II. Buying the product closest at hand: If there is an insurance agent at hand, then the ‘flavor-of-the-season’ insurance plan is purchased. If the bank is close by, then all the money goes into Public Provident Fund. The least ‘hassle’ product gets the maximum attention.
III. No investment required: If, for example, the annual PF deduction is more than the limit of Rs 1 lakh, then in most cases, no fresh investment/saving is made.
IV. Buying without a thought: In the rush to get over with this ritual, most people just pick up anything with little or no thought and move on.
V. Last minute stampede: This is where most of the investors are trapped. Instead of making the investment during the year, most choose or are reduced to making the investment at the fag-end or (even) on the ‘last day’.

Avoiding the mistakes

Have you ever asked yourself - ‘Why do I work?’ The answer to this question is likely to be one of the following:
i. To be gainfully employed
ii. In order to be economically stable and to provide yourself and your family a financially secure future

What is the point of working so hard and putting in such long hours if at the end of the day you can’t have a financially secure future? It is crucial that one spends some time with a financial planner to decide the way ahead in terms of the investments. What one sows now in terms of the kind of investment will one reap in future.

A careful and studied analysis needs to be done before making any investment. It is not sufficient to just buy a product for the sake of fulfilling a requirement. Tax saving has to fulfill your overall goal of ensuring a financially secure future for you and your family.

Some crucial questions that must be answered before making the investment:
a. Have you looked at what you have purchased? (Most people I know cannot even remember the name of the insurance company or mutual fund whose product they have bought; and yet others have no idea about the kind of policy that they have purchased.)
b. Is this what you really need? Or is this just another blind investment in the myriad investments that you have accumulated over the years?
c. Is the compulsory saving (within the limit of Rs 1 lakh) enough to meet your financial goals? Have you spoken to an (unbiased) financial planner (as opposed to an agent who is selling you a product) to figure out what kind of returns you may get after 10 to 20 years? Take a look at the table below to get an idea about what your investments would be like 15 years from now if all the saving you made are those under Section 80C:
i. Time horizon - 15 years
ii. Inflation @5% p.a.
iii. Annual investment - Rs 1,00,000
Type of investor Expected return End-corpus
Conservative @ 6% p.a. Rs 16.04 lakh
Aggressive @ 10% p.a. Rs 21.19 lakh

Assuming that your objective was to utilize the investments you made each year for your retirement, is 21 lakh enough for you to meet your post-retirement expenses? Do a quick back-of-the-envelope calculation and figure out how many months the money will last?

This clearly brings to the fore the fact that saving just the Rs 1,00,000 per annum cannot make you financially secure. It simply saves you some tax. In the above example, we have not taken any other milestone/event – such as your own marriage, buying a house, education of your children, their marriage, family contingencies, etc. into account. Setting aside Rs 1 lakh a year certainly cannot help you achieve all these goals.

Tax-saving vs. financial planning
Most people believe that buying a tax-saving product is equivalent to financial planning. Products are purchased by the name like ‘XYZ Children’s Plan’ or ‘ABC Retirement Plan’. The investor buys the product and thinks that all will be well in future. But there is much more to planning for the future than just buying a product. Just as in financial planning proper asset allocation and the dynamic management of the portfolio in tune with the changing of goals and objectives is a necessity, so it is in the case of tax-saving investments. In most cases, tax-saving products are haphazardly purchased every year or the entire limit is exhausted by putting the money in a single product. This is not a good approach since these are supposed to result in long-term benefits. But since the whole exercise is without any planning it is most likely not to give the desired results. Hence it is of utmost importance that there is a well-planned and analyzed decision before investments are made.

Where a Financial Planner can make a difference

Financial planning is still a nascent concept in India. Today most financial products – such as insurance, mutual funds, fixed deposits etc – are being bought and sold without the slightest of care and concern about the future. The presence of an agent with a glossy presentation and flashy numbers is enough to convince any investor, with scant regard for what these investments would actually fetch him/her 10-15 years from now.

This is where a financial planner can and should step in. He/she is there to sell a lifestyle and not a single product. His/her knowledge and acumen is bound to make a huge difference in approaching the subject of financial security and in providing an appropriate solution. His or her interest lies in providing proper long-term financial planning, thereby making the investor look at the ‘big picture’ instead of having a narrow and short-term outlook. A thorough analysis should be done of the current holdings and objectives that are to be met by making these investments. And based on these considerations, the financial planner must recommend a product that is suitable for his/her client.

In short, investments should be towards achieving a certain objective, with a tax-break thrown in. The goal should be to maximize your post-tax income since there is a limit to saving tax.

An introduction to financial planning

Here’s a lowdown on financial planning and how it can help you lead a life of your dreams.

Welcome to my first blog. Let me begin by introducing myself, my firm - Knowledge Partners - and our philosophy. I am an Associate Financial Planner and have also done my PGCBM from XLRI, Jamshedpur. In 2005, I moved to Gurgaon after spending 14 years in equity research, media and marketing at various firms in Bombay & Calcutta. Numbers always intrigued me. So did various financial instruments. But I also saw how people all around me were getting mislead by so-called ‘advisors’ and ‘agents’. While everyone wants a financially secure future, most people were either unaware or confused as to where and how to start. The result - decisions got indefinitely postponed; or wrong products were bought based on misinformation.

That’s what reinforced my decision to start my own financial advisory. And in 2006, Knowledge Partners took shape.

Financial Planning, as a concept, is still quite new to India. Traditionally, financial advice in Indian homes (invariably) comes from a family elder - who is, more often than not, heavily under influence of an insurance agent or a family friend.

Often, agents and advisors give you an improper advice so that they can make a quick buck. They often sell you a insurance policy or a mutual fund that gives them the highest commission or brokerage.

At Knowledge Partners, we believe in having a long-term relationship with all our clients and advise them to buy financial products they actually need. Our endeavor is to be a partner of our clients till the time they achieve their financial goals.

Have you planned your financial future?

You can get answers to this question by answering these simple questions:

· Have you started planning for your retirement?

· Have you wondering how to plan for retirement, children’s education and marriage in the face of rising inflation?

· Do numbers boggle you?

· Are your savings fetching you sufficient returns?

· Have you ever thought as to how many years you can maintain your current lifestyle if you were to take a sabbatical / retire?

· Is your money lying ‘idle’ in your savings/current bank account – would you not like to earn more than the meager 3.5%?

· Most of us limit our investments to tax saving instruments – or the amount that is to be covered under section 80C. But is that enough to meet all your future expenses? Will that create a sufficient corpus?

If these are some of the questions that are bogging you down, Knowledge Partners could be of help. We are a Gurgaon-based firm offering fee-based services in the area of financial planning having a clientèle in the Delhi-NCR region, primarily, and also in Bombay and Calcutta.

How do we go about it?

Our investment process begins with you. We perform a careful assessment of your individual needs and aspirations, and our evaluation is based on:

· Goals and objectives,

· Investment time horizon,

· Liquidity needs,

· Desired rate of return, and

· Tolerance for risk

The result is a complete understanding of your personal profile that will serve as the foundation for defining a long-term investment strategy tailored to your specific needs and preferences and not just catering to your ‘tax planning’ requirements u/s 80C.

Our philosophy is designed to achieve long-term investment goals, and is based on the following core principles:

1. Identify Your Unique Needs, Goals and Objectives

2. Build an Asset Allocation Roadmap

3. Formulate a Plan & Portfolio Selection

4. Continuous Portfolio Monitoring

We educate our clients so that with time they are more focused to achieve their goals and objectives with the help of their financial advisor, rather than by relying blindly on the latter.

Our fee-based approach is designed to eliminate conflicts of interest and results in unbiased and honest advice.

Money isn’t everything, but having control and confidence about how you are managing it can allow you to concentrate on other things like your family, your career, and your future. We believe that all your dreams are achievable and we look to partnering you so that you can live your dreams!