Plan Your Taxes Now!

The year 2016 is ending in a day. It was a wonderful year, full of excitement, joy and surprises. When 2016 started, most of us made new year resolutions, we decided to be nice to others, quit smoking, start going for a morning walk, and bring in discipline into our lives. We also decided to bring in financial discipline and start saving, among others. Many people did follow their resolutions, did a proper financial and tax planning, while others forgot about it.

We declared our 80C investments under random heads in April, because we did not plan ahead, and then we relaxed, since those investments were being considered in salary calculations and TDS was not being deducted upto that extent.

Now is the time when the HR mails have started entering our mailboxes or will start soon, asking for tax proofs. Now we realize, we should have planned for taxes earlier. If we do not plan for taxes and invest now, the accumulated TDS will be deducted from our salaries, which will be a huge amount. Since the time is less, we take decisions in a haste, and tendency to take wrong decisions increase. We might invest in random tax saving instruments in which our friends are investing, not realizing that those instruments may be suitable for them but not for us. Some businessmen paid their advance taxes, while others did not, and will be investing in random instruments in the month of March, because there is no HR to remind them.

So, if you are the one who did not plan for taxes earlier, do not waste time and start planning now.

You must keep in mind a few factors before beginning investing:

1. Calculate: Assess how much you need to invest. Calculate your total annual income, including the expected income for the next three months. Also consider the expected bonus, if any. Now work out how much you need to invest in tax saving instruments to save maximum taxes.

2. EPF: You must remember that every month, an EPF deduction was being made from your salary, so you should minus the total EPF contribution from the total investment that you have come up to, in the first step and plan for the rest.

3. Insurance: Though you get tax deduction in some insurance policies, yet you must remember that insurance is meant to protect you and it is not an investment. You need insurance to protect you, your dear ones and your assets in case of emergencies. It is very important to have adequate insurance, but while you are tax planning, you must focus on products which will give you tax benefits as well as maximum returns. You shall also consider health insurance while planning for taxes as apart from giving you a medical coverage, it entitles you to claim Rs 25,000 under Section 80D for premiums paid for self, spouse and kids. You can also claim an additional Rs 25,000 for premiums paid for your parents (an extra Rs 5,000 if your parents are senior citizens). Health insurance deduction is over and above the Rs 150,000 deduction under Section 80C.

4. PPF, Bank FD, etc.: Before investing in PPF, you must consider the fact that you cannot withdraw your investment for the next 15 years. Secondly, in traditional investment options like FD, PPF, etc. the return that you will be getting is around 8% and there may be options which can offer a higher rate. So evaluate all investment options before moving ahead.

5. ELSS: Equity linked Saving Schemes (ELSS) in Mutual Funds lets you save tax under Section 80C of the Income Tax Act. You can invest upto Rs 150,000 in a year in ELSS and get tax deduction and the best part is it has the shortest lock in period of 3 years, as compared to other tax saving instruments. You shall contact your financial advisor and he will guide you in selecting the best schemes for you.

6. Other Sections: The Income Tax Department allows you save tax in a number of ways under a number of sections. You must evaluate if you can save some extra tax with those sections.

Remember, Tax Planning isn't rocket science, you just have to plan in advance, you may use the above tips and save taxes and do follow your resolutions from the next year.

Don’t chase performance

“Chasing fund performance is often the quickest way to hurt your mutual fund returns.”- Arthur Levitt

Many investors get bored with holding the same portfolio. That too if a fund underperform, they want to quickly change to a better performer. Once a portfolio is a chosen, we suggest changes only infrequently. This is because all funds and fund managers go through periods of underperformance. No fund is consistently on top every year. Last year’s top performer can be this year’s bottom performer. Last year’s poor performer can be this year’s best performer. Though we do have yardsticks in funds selection; it is more of what not to choose and what to avoid. By minimising errors, and giving a diversified portfolio of 5 funds from five different fund houses, we aim for a decent return over 10 year period or so.

Our biggest value addition is we interfere less in your wealth creation journey. We also ensure that you do not become a hindrance in your own wealth creation. Since you are only used to us, you don’t know how uncommon this is. Someone who is our client for last 10 years would hold most of the same funds we selected at the beginning. Holding a portfolio for 10 years is uncommon in the market. The average equity fund holding period is only around 18 months. By our approach, we ensure that the return you earn is equal to fund’s return over a 10 year period. What is the big deal in this? Very few investors earn what the fund earns. There is a huge gap between investor’s performance and investment’s performance as people redeem after bad years and invest after good years. We ensure that you don’t fall into this trap. For our clients, the investment returns and the investor returns are the same.  It would definitely sound boastful, but the fact is this  places you among a very small group of successful investors.  

Please read this article which talks about a study done by Vanguard.

I’ve given some excerpts below.

“The other study was authored by U.S. ETF giant Vanguard, which looked at the histories of more than 3,500 equity mutual funds in order to compare a basic buy and hold strategy to a frequent-trading strategy that simulated the effect of performance chasing.

The study looked at three-year rolling return performance between the years 2004 and 2014, across nine equity groupings (this is roughly in-line with the time the average fund investor holds an equity mutual fund). The simulation also tracked the Sharpe ratio of the average fund in the category, a measure of risk-adjusted return.

The “rules” of the buy and hold were relatively simple: the simulation invested in any fund, and held it to the end of the time period. If the fund was discontinued, the simulation simply reinvested its money into the median-performing fund within the grouping.

For the performance-chasing portfolio, the simulation invested in any fund with an above average three year annualized return. If that fund turned in a below average performance for the next three year rolling period, that fund was sold and the simulation reinvested the proceeds in equal amounts into in the top twenty funds in the asset grouping.

At the end of the day, the simulation produced a total of more than 40 million return paths–a pretty good yardstick for measuring whether performance-chasing or buy and hold is the more sensible strategy.

Category            Buy & Hold      Performance chasing

 Large Blend            6.8%                      4.5%

Large Growth          7.1%                      4.3%

Large Value             7.0%                     4.7%

Midcap Blend           8.9%                     4.9%

Midcap Growth         8.6%                     5.7%

Midcap Value           9.2%                     7.6%

Small Blend             8.9%                     6.3%

Small Growth           8.6%                     5.7%

Small Value              9.3%                     5.8%

The chart above illustrates that buy and hold was the clear winner, beating performance-chasing in all nine style boxes. Note the size of the performance gap between the two strategies.

The Sharpe ratio was better (i.e., higher) for each of the buy and hold portfolios, meaning there was less volatility along with better returns. Talk about having your cake and eating it too! “

We will never chase performance and would not allow you to do the same as well. That’s why you’ve chosen us as your advisor. Our key objective is to ensure that as investors your earn 100% of investment returns without any slippages due to behaviour gap (i.e.) the misbehaviour of chasing performance based on past data.