Slow & Steady Wins the Race

It's the time of the year when we need to think of our tax-saving investments. No, this article isn't appearing three weeks later than it ought to have. You are reading this on 9th April and I'm talking about this year. This is actually the right time to plan for the tax-saving investments that many, if not most of us, would normally wait for till about March 2008. Perhaps we have become so used to catching deadlines at the last moment that we don't even think of planning taxes till very late in the year. Since we all see tax-planning as the purpose of these investments, and we get exactly the same tax break no matter when we make the investment, it seems fine if we ignore them till very late in the year. However, this is not true. There are a lot of advantages of planning these tax savings investments right at the beginning of the year and spreading them out throughout the year. Let's see how.

For most salary earners, the formula that tells how we should decide where to make our Section 80C investments is very simple in my opinion. Just subtract your annual provident fund contribution and any other pre-committed 80C eligible deduction (school fee, insurance premium etc) from Rs 1 lakh and invest the balance in a good tax-saving equity mutual fund (sometimes called ELSS funds). Since tax-saving investments are long-term investments, equity makes the most sense. However, equity investments offer higher returns and lower risk if you invest steadily over a period of time instead of all at one go.

Therefore it's best to calculate the amount you need to invest during the year, divide it by 12 and start an SIP (Systematic Investment Plan) for that amount right now in the month of April.

Investing in this drop-by-drop fashion has many advantages. For starters, you will invest without feeling the pinch of a large outgo at the end of the year. When March 2008 comes you will already be through with investments. Just as important, investing gradually in equal monthly amounts will protect you from the vagaries of the stock markets. You will end up acquiring more fund units when the markets are down, something that will automatically ensure higher gains eventually. This is always the best way to invest in equities and the predictable nature of tax-saving investments makes it specially easy to do it this way.

However, even if you decide that equity is not your cup of tea and you'd rather stick to a guaranteed investment like Public Provident Fund (PPF) or bank fixed deposits (which are now eligible for deduction under section 80C), it still makes sense to invest steadily throughout the year rather than at the end just to avoid a single big hit in March. In fact, if you are going to invest in PPFs or FDs and you happen to have the money lying around in a savings account or another ready form, then it's probably better to do the entire investment right now. After all, the tax savings investments have a lock-in period and the sooner you start the lock-in, the sooner it will eventually end and thus free up the money for other uses.