Personal Finance

PERSONAL FINANCE
Make Your Tax-Savings Grow

While choosing a tax-saving scheme, don't lose sight of long-term money growth

By Dhirendra Kumar

It's time (again) to think about saving on your taxes. And with all the noise that tax-saving mutual funds have begun to make, arriving at a decision is becoming difficult. When choosing a tax-saving investment, what is important is that you should never lose sight of your priority: the real long-term growth of your money.

With equity values declining, the investor's preference for fixed-return tax-saving schemes--like the National Savings Certificate (NSC)--is understandable. The tax-saving mutual funds have been poor performers and the investor hasn't gained much by investing in them. Of the 8 tax-savers that date back to 1995, and opened for repurchase in April, 1998, only Kothari Pioneer's Taxshield offers a healthy return to investors. Others lie well below their par levels.

There are 2 factors that the investor should keep in mind while making an investment, even if it is only for tax-savings:

Check out the ceiling on the returns obtainable from the old sovereign favourites. The ceiling limits the potential for money growth. Also, the 11.50 per cent annual returns from the NSC, with its 6-year lock-in period, may not be quite as attractive today as had been in the past.

There are bargains in the mutual funds segment, despite the need to make the risk-return trade-off. The funds have the potential to gain with the surge in equity values. And this is evident in the case of Equity-Linked Savings Schemes (ELSS).

Thirteen tax-saving funds were floated in 1996, which will be due for repurchase from April 1, 1999. Tax exemptions are available on these mutual funds to the extent of Rs 10,000. Of these, 8 are currently above their par values. As ELSS funds have a 3-year lock-in period, which prevents short-term market volatility, an investor with a long-term view is likely to do well with them. Remember, these schemes have actively-managed, diversified portfolios. However, anyone looking at an ELSS fund as a medium-term investment, with the intention of exiting just after the lock-in period, should give them a pass. The best gains come with an investment timeframe of 5 years and above, which best equip the investor to ride short-term volatility in the equity markets best. Perhaps the strongest argument in favour of a tax-saving fund vis-a-vis a fixed return tax saver--like the NSC or the Public Provident Fund--lies in the fact that the best security eventually is money growth, and these funds are growth vehicles.

So, does one go to the mutual funds for a tax shelter? The final decision rests entirely on the investor's risk-tolerance and liquidity needs. But these funds do look good bets for money growth. And that sure won't tax your savings.

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