TomorrowMakers

Your first moves in this financial year will be the difference between having a larger corpus next year or scrambling to save taxes.

New Year Financial Resolutions

It’s that time of the year when, having submitted ‘mandatory’ proofs of investments for yet another financial year to your employer so that your tax burden is relieved, you prepare to get back into your everyday groove – till next February, when the scramble begins again.

But hang on, are you sure this is the right way to go about financial planning for the year ahead? Are you not aware that a last-minute scramble can be fraught with pitfalls? Wouldn’t it be better to get a fix on budgeting and planning finances right now – in April – for the year ahead? Finally, shouldn’t you have financial goals, instead of hoping that year-end forced savings will take care of ‘investments’?

Pitfalls of scrambling

Wrong product: An investment scheme that suits a colleague, based on his or her needs, priorities and financial goals, may not be ideal for you. Your own situation is unique. Why follow a colleague in buying a particular investment product, just because it comes with tax benefits?

If you buy a product blindly because your colleague did, you would have ticked the right boxes on paper – made an investment and saved on taxes. In reality, however, you would have missed the bigger financial picture – that of meeting your goals and needs within a stipulated period of time.

You could also end up investing in a wrong mutual fund scheme, believing it is eligible for tax deduction. Only equity-linked savings schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act. In your rush, you could miss checking whether the product is eligible for a tax deduction or not.

Wrong Mode: You may also become guilty of using the wrong mode of payment – say cash – to invest, in which case the investment may not be considered for tax deduction. Health insurance premiums are deductible under section 80D of the IT Act, as are charitable donations (up to 50-100%), but cash payments do not get tax deduction.

Planning and budgeting

Ideally, instead of waiting for your HR department to hound you for annual investments next January, start planning finances now – when the pressure is less. Financial planning should begin with you getting a handle on your financial goals, both short-term and long-term (a car by the year-end, booking a flat by next June, how much to have in your retirement fund when you’re 55).

You must also become realistic about budgeting: how much money from your salary or savings you can afford to invest to achieve these goals, and the time needed. Once this is settled, prepare a list of deductions, and select the products that can ensure maximum tax benefits.

The first thing to know is that there’s no single best way of investing money; from the numerous schemes, you should select an option that suits you best – that is, one that can help you reach your goals within your means. Once you narrow these down, you are ready to begin investing.

Investing in FDs etc.

It’s advisable to diversify your funds according to your risk appetite and preferred period of investment. One traditional method of investing is fixed deposits (FD), offering steady returns of 6-7% annually. You can park some money in FDs, say through HDFC Bank, which provides great rates, flexibility, and security in one product. You also have the convenience of booking deposits through its NetBanking facility.

FDs offer risk-free solidity to your portfolio, and the rest of your investible funds can be diversified into areas such as post-office savings schemes (which have no risks). You can also consider PPF (Public Provident Fund), which offers tax benefits under section 80C; and an 8.1% rate of interest with a lock-in period of 15 years.

Life insurance is another essential risk protection tool that can provide financial security to your loved ones in case of any unexpected emergencies, and even offers tax benefits. You can choose from a variety of plans be it Protection, Savings & Investment, Child and Retirement across different life stages or needs. Similarly, health insurance plans can ensure you are financially prepared to face medical exigencies and deal with them efficiently.

ELSS is also eligible for tax benefits* and has a short lock-in period of three years. However, returns earned through this investment will be taxed at 10% if gains exceed Rs. 1 lakh. Gold too remains a good long-term investment option, though it is vulnerable to market fluctuations.

Last words

Along with all your investments, remember to get enough risk cover through health and life insurance to protect yourself and your family. Go for flexible insurance plans such as those distributed by HDFC Bank to cover expenses that may result from hospitalisation, post-hospitalisation treatment, disability, injuries, surgical procedures, and domiciliary treatment.

You must consider these an essential part of your financial portfolio and not just another investment option.

Disclaimers:

*Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

** Mutual funds are subject to market risks, read all scheme related documents carefully.

This Article is intended for general information purposes only and should not be construed as investment, insurance, tax or legal advice. You are encouraged to separately obtain independent advice when making decisions in these areas