Did you start your tax planning, yet? No, this is not January. And, I am not your accounts guy! But that’s the usual scenario, right? At around January, you get an email/circular asking for submission of “proofs” of investment for tax deductions. You panic and your discussions for the next few days would be where to invest, which scheme and how much. Adding to that confusion, all media channels are flooded with adverts of “tax-saving schemes” that promise the “best returns”. This increases anxiety levels, significantly and in turn triggers the impulse to ‘do something and get done with it’. And, that is bad for your financial health.
You must not decide on investments when you are anxious, as it affects your thinking. How? Chris Williams, professor of psychosocial psychiatry at the University of Glasgow, and medical advisor to Anxiety UK says, anxiety is good in situations of imminent danger as it helps you to stay alive but, that same anxiety causes errors and can interfere with what you want to do, when you need to think clearly at a higher level.
Usual result of such investment decisions, made by a stressed mind, is that it goes wrong or is inappropriate for your financial goals. History has shown that the maximum inflows to ELSS (Equity Linked Savings Schemes) schemes happen during the last three-four months of the financial year.
So, how to avoid that trap? A first step would be to check how much you really need to invest for tax savings purposes. You would need to include things like EPF etc. to arrive at the final figure. This is important as tax savings instruments have lock-in periods, usually a minimum of three years. So, there is no point in investing extra when you invest that same amount in a scheme that does not lock you down.
Options are a multitude. Also, don’t keep on changing the investment option with the latest trending fad. Ideally, treat this corpus as a retirement fund and keep adding to it for the long term. Even the PPF account can be extended indefinitely. If your choice is mutual fund-based ELSS schemes, SIPs have done much better when the market is overheated as is the case now, with market index PE levels at ~25. Investing lump-sum with high downside risk makes positive returns very unlikely in the near-term; and, drag the overall returns over the long-term. Stay away from ULIPs altogether, insurance and investment are like drinks and driving, they just don’t mix well.
So, kim kartavaym? (that’s Sanskrit for “what is to be done?”). Well, start “scheming” now!
The author writes commentaries on contemporary financial, business, taxation and political issues