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These simple financial tricks will help you boost returns manifold, cut down taxes
It’s the start of the financial year 2015-16. This is also the time when every investor should put in place a plan for investing and saving on taxes using all the options that the government has given to them. However, according to financial planners and advisors, while putting in place a long-term financial plan, the main aim should not be tax savings. The main aim should be to build the required corpus for the goal for which you are investing. Here are some tricks that will help you build wealth in the long run without much thought…
Use your bonus wisely
This is the time a lot of people get a bonus. According to top of ficials at mutual fund houses and financial advisors, rather than spending on things that may not be an absolute necessity, you can invest the whole or a major part of the bonus in an equity mutual fund. Let us assume that you get a bonus of Rs 3 lakh this year and you put the whole amount in an equity mutual fund.
Now let us also assume that every year your bonus increases by 10% while the equity fund you are investing in, over a 10 year period, gives you a return of 12% per annum.At the start of the second year, your bonus is Rs 3.3 lakh and at the start of the third year it is at about Rs 3.6 lakh. At this rate, at the start of the 10th year, your yearly bonus will be about Rs 5.7 lakh. But if you have invested your yearly bonus every year in the equity fund that gave an annual return of 12%, your total corpus at the end of the 10th year will be a little over Rs 80 lakh. This looks like a staggering amount, but there is no magic in it.
Make good use of ELSS
According to financial planners and advisers, equity-linked savings plans (ELSS) floated by mutual fund houses are one of the best tax saving options for investors. This is because in the long term they have the potential to generate an average annual return of 12%, saves on taxes under section 80C of Income Tax Act and has a lock-in of just three years.
The returns from all ELSS are also tax free while the costs are around 2.5% per annum, one of the lowest for similar products. In comparison, most of the other tax-saving options cannot generate as high a return, costs are higher and returns are taxed on redemption. A combination of some of these factors makes such products unattractive in comparison to ELSS. So suppose after taking care of your contributions to provident fund, home loans, etc, you are still left with about Rs 60,000 to invest to save taxes under section 80C, go for one or more SIPs aggregating Rs 5,000 per month so that your yearly contribution is Rs 60,000. At about 12% average annual return, in 10 years, this can grow to be an Rs 11.6 lakh corpus.
Use excess cash intelligently
If you keep the excess cash that you need at a short notice, you probably keep it in your savings bank account. However, a better alternative is to keep it in a liquid fund of a good mutual fund house. Compared to 4-6% annual return that you can get in your savings bank account, liquid funds on an average has given a return of over 7.5% in the last five years while some of the best liquid schemes have returned over 8.6%. This higher return comes at a slightly higher risk and slightly less liquidity, that is about 24 hours, compared to money at call in case of savings bank accounts. So, if you can manage your cash inflows and outflows well, you can put your extra money in liquid schemes and earn much higher returns. There’s alternative to FDs Fixed maturity plans (FMPs) are a good alternative to fixed deposits (FDs). If you are keeping your money in FDs for three years or more, FMPs of similar maturities can give you a much better return as FMPs enjoy long-term capital gains tax advantages if the money is kept for more than three years. FDs do not enjoy similar benefits.
In our next edition, we will tell you how you can use SIPs in mutual funds for better tax planning.
SWATANTRA INITIATIVE ON ETNOW
UTI MF Swatantra initiative is on ETNow as well. In the next few weeks, the following topics will be covered over several episodes: young working professionals, single working professionals (female), married professionals without children and doctors. If you belong to any of these groups and have queries related to financial planning, you could post them on http:www.indiainvestkaro.com and some of the most relevant ones would be answered by experts and professionals from the field.