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Optimize Investments under Section 80C

Current growth of stock market can make anyone think about investing in stock market in different shares, even when they know little about the strategies and dynamics of the stock market. But the fundamentals of investments should not be changed, they might restrict you from getting windfall gains but will secure your exposure and risk in such a manner that when the misfortune comes you suffer the least and don’t see deterioration of your wealth. The most important factor of determining the investment strategy is the risk profile of an individual, which will depend on various factors starting from Age group, Experience and knowledge about investments, family responsibilities and risk appetite. To know your risk profile you can download the following sheet to check your fund allocation strategies. Password is eduform2

 http://www.2shared.com/file/Zh8LwVP1/Risk_Profiling.html

Depending on your risk profile, suitable investment options should be selected. All the investment options are categorized in two categories

Variable Income Investments: Investments for which returns are unknown and driven by market conditions. Such investments are considered to be more risky, liquid and required more active involvement from investors. There are different options under this category to offer optimized risk and return with lesser involvement in monitoring. Most of them are investments in shares and commodities, therefore called as Equity oriented investments.

Fixed Income Investments: Investments which offers a fixed assure return like fixed deposits in banks are considered as fixed income instruments. Investments under this category are less risky, required less monitoring and efforts so preferred for less aggressive investors. Most of the investments are Fixed Deposits, Government or Company bonds hence also known as Debt oriented funds.

Once you know how much money you planning to save, and what are your investment objective and time frame. You can allocate your money among various investment options you have. For e.g. Rajesh’s annual savings are INR 100,000 per annum and his basic purpose of investment in only tax saving. Therefore, his all investments have to be in options available under income tax section 80C. His risk profile score is 20, since all investments under sections 80C have lock in period of more than 3 years so all options will be classified under medium term investments and allocation has to be

As discussed in last article about the various investments options we have under section 80C.

There classification under above two heads will be like: 

Now investment in options under various heads depends on two parameters time period of investment and returns on investment. In last 5 years, returns of equity oriented investments are in range of 20-25% per annum which is tax free and without taking in account the savings on taxes. This return is higher than any fixed deposits and debt instruments available in market. Since it is market linked, if we reduce the return calculations for last three years only then it is in range of 10-15% per annum. The surety on returns of these instruments is lesser so they are considered to be riskier. Since the investment time frame is 3-5 years almost 60% of investments should be in these instruments. On basis of time horizon if we see ELSS have a smaller lock in period of 3 years only and can be redeemed as per requirement, while Insurance plans have a longer maturity period of more than 10 years in general and redemption before that period result in lower returns. Therefore the priority list should be

  1. ELSS funds for short/medium term investments
  2. ULIPs and Insurance plans for long term investments

Similarly return on all debt oriented instruments is been around 7-10%. The main reasons of these investments are saving tax and preserve wealth while eliminating the effect of inflation. The main deciding factor of these instruments is the time period for which we want to invest, depending on long term/ medium term investment strategy. Hence the priority has to be

  1. Bank FDs, NSCs, NABARD & Infrastructure Bonds for medium term investments
  2. PPF, EPS & Insurance policies for long term investments

This analysis was applicable only for the scenario when all the investments to be made are for tax saving purpose. To know more for different investment options and strategies read the next series of articles on Investment strategy. Next blog on “Determining your net-worth and saving strategy!” will be published on 16th October, 2010.

In case you have any other queries and suggestions do write to us @ eduform.in@gmail.com

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