In our view, investing in an instrument like a tax-saving fund with the sole purpose of saving tax is not a smart move. In the long term, it could be these very investments (to which most people give little thought) that make a significant difference to your finances.
So, this year, before you start the annual ritual of tax-saving, be sure what you are setting out to achieve and then invest accordingly.
Some of these aspects, have been discussed by us in our recent research note: Tax planning: Research is the key!
Tax-saving funds are a key part of any portfolio that is designed for the Rs 100,000 investible limit as defined under Section 80C. These funds are basically equity schemes and therefore carry high risk; unlike a PPF or a NSC where your investment grows at a steady pace, with equity funds you risk losing your capital, let alone not earning a return.
Leading tax-saving funds
| NAV (Rs) | Net Assets (Rs m) |
1-Yr (%) |
3-Yr (%) |
5-Yr (%) |
Std. Dev. (%) |
Sharpe Ratio (%) | |
| MAGNUM TAX GAIN | 45.33 | 2,379 | 124.8 | 86.9 | 30.3 | 8.96 | 0.62 |
| PRU ICICI TAX PLAN | 65.51 | 1,553 | 94.2 | 77.6 | 41.7 | 10.06 | 0.43 |
| HDFC TAX SAVER | 95.62 | 1,306 | 97.8 | 76.2 | 42.4 | 8.12 | 0.55 |
| HDFC LT ADVANTAGE | 64.66 | 2,210 | 66.6 | 73.1 | - | 8.29 | 0.51 |
| BIRLA EQUITY PLAN | 46.88 | 629 | 62.8 | 69.7 | 29.5 | 8.03 | 0.40 |
| TATA TAX SAVING | 42.25 | 846 | 65.0 | 64.3 | 32.5 | 7.98 | 0.43 |
| SUNDARAM TAX SAVER | 17.27 | 239 | 70.9 | 61.3 | 32.7 | 8.63 | 0.41 |
| FRANKLIN INDIA TAXSHIELD | 85.03 | 1,729 | 55.0 | 55.8 | 29.5 | 6.91 | 0.45 |
| PRINCIPAL TAX SAVINGS | 47.96 | 1,133 | 55.5 | 54.6 | 30.4 | 6.99 | 0.43 |
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)
However, financial planners like us hold the view that over a 3 5 year period equity funds stand to generate a much better tax-adjusted return as compared to other tax-saving instruments. The underlying assumption we make:
One, the funds that you have chosen are 'well managed', and
Two, you have invested in the stock markets at a time when there are 'investing opportunities' (reasonable valuations) available. In this case however, you can dilute the risk of timing the market by going in for a Systematic Investment Plan (SIP).
So, how do you select the fund that is "well managed"?
The best way of course is to ask your investment advisor. The underlying assumption here is that your investment advisor is in a position to offer you timely, in-depth and credible research (Read the latest FundSelect report from Personalfn -- HDFC Tax Saver).
The other option is more time consuming: do your own research. In most instances this is not really an option because investors like you either do not have the time or the access to credible sources of information/data.
Once you have evaluated a fund on these parameters, you will be in a position to select what suits your requirement best.
Investing to save tax? Personalfn can help you. To benefit from ideas that work in your interest, click here!
