Real Returns. Take your 80C seriously

“ Jaldi ! What’s a good investment I can make before March 31?” asked a friend, calling me last week. “But why should you invest before March 31? Why not take time over it?” I asked. “ Arrey , I am short of my 80C investments and need to do it before deadline” she said, puzzled at how dense I was.

Many investors take a ‘fill it, shut it and forget it’ approach to their Section 80C investments. They don’t give much thought to where they’re investing as long as they get to that ₹1.5 lakh limit. But given that we all have only limited ability to save, it is important to ensure that our Section 80C choices actively contribute towards our long-term financial goals. This takes some planning. Here are the questions to answer before you flag off your Section 80C investments for 2016-17.

If you believe that all the savings you plough into Section 80C are ‘investments’, you are mistaken. The long list includes some savings options, some wealth creation vehicles and items that can only count as expenses (such as children’s tuition fees).

Many investors sign up for life covers and traditional insurance plans with hefty premia as an easy way to fill up the 80C quota, under the mistaken belief that these are great investments. They aren’t. Pure term policies are protection products that pay your dependants on your death. Traditional insurance plans offer ultra-low returns that lag inflation. While choosing your 80C instruments for the year, don’t lose sight of the primary objective of making any investment — getting a reasonable return.

A good financial plan requires you to get your asset allocation right. This should not depend on convenience, but on your age, life stage and risk appetite. This applies to your 80C investments too.

If you are an investor in the twenties, thirties or forties, you can afford to invest more in ELSS funds or the equity component of NPS to fill up your 80C limit for the year. Don’t take the lazy way out and maximise your voluntary provident fund contribution (VPF) instead. This can really cost you in long-term returns.

Take the simple comparison of Santosh who swept ₹1.5 lakh from his salary into the VPF over the last 10 years (2006 to 2016) against Ashutosh, who invested the same sum in an ELSS fund (for example, Franklin India Taxshield). If you calculate their investment value today based on the actual interest rates declared by the EPFO, you will find that Santosh has accumulated just ₹24 lakh, whereasAshutosh has accumulated over ₹39 lakh. Equity allocations have fetched him 63 per cent more.

But if you are in your 50s, don’t max out on ELSS funds just to meet 80C limits, as market swings can decimate your corpus just before retirement.

Do you need liquidity?

All Section 80C investments require you to lock in your money for a specified term. But the lock-ins can stretch anywhere between the three years stipulated by ELSS funds and 30-40 years (until you retire) under the EPF and the NPS. Before choosing your instruments, pay attention to your cash flow needs.

Do you have a big financial goal — like your child’s college or purchase of a home — coming up within the next ten years? Then, you should think twice about parking too much money in the EPF (where withdrawals are restricted until you turn 57) or even the NPS (where you can withdraw only 25 per cent before 60). Opting for shorter term 80C instruments — like the five-year NSC or tax saving deposits — may be better, despite lower returns.

The assured-return options in the 80C menu are shrinking and market-linked options are expanding. After recent changes, the following are one-shot 80C instruments where you can lock into a fixed return — the NSC, post office time deposit, POMIS, tax saving bank deposits and Kisan Vikas Patra.

Schemes such as the EPF and Public Provident Fund (PPF) are now in the nature of floating rate instruments, where you returns will change as new rates are announced every quarter (with PPF) or every year (with EPF). There’s the third set of schemes - NPS and ELSS- where returns depend entirely on market behaviour and fund manager performance.

In choosing your 80C investments, either go in for assured return schemes that lock in your returns five years or more. Or if you are going to take on market risks, opt for schemes that offer flexibility to exit in case of poor performance. The NPS allows you to switch between assets or fund managers if you are unhappy with the performance of your account. ELSS funds carry only a three-year lock in; you can opt out after this if the returns are disappointing.

But despite their tax-free returns, the PPF and VPF, which subject you to floating rates even as they lock in your money for the long term, don’t make much sense any more. If their returns turn out to be too low for comfort in future, you can’t promptly exit.

As we head into the new financial year, redraw your 80C plans on the above lines and don’t leave it to the last minute.

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