Fund Talk: 70 to 80 per cent of your savings should be allocated to equity : Business Line

I am 24 and have been working for the past couple of years. Now, I am confused as to which tax saving instrument is suited for me. From the various debt options and tax saving mutual funds on offer, where should I park my money?

Gaurav

Equity investments have the potential to deliver good returns and with many years of income ahead, your risk tolerance is higher when you are young.

The larger chunk of your savings – 70 to 80 per cent – should be allocated to equity. You must use a combination of PPF, NSC and equity-linked saving schemes (ELSS) for effective tax-saving purposes combined with portfolio building. So, you must make use of the provision (under Section 80C) by investing up to Rs 1 lakh in eligible investments. Eligible schemes have a lock-in period. These schemes, which are debt-oriented, currently offer fixed returns of 8 to 9 per cent.

To get tax savings for equity investment, you should consider Equity Linked Saving Scheme (ELSS), which is similar to a diversified mutual fund. They have a lock-in period of three years. In case you choose the SIP route to investing in these funds to ride out market volatility, please be aware that each instalment is locked in for a period of three years.

The best ELSS funds have given a return of 21 per cent in the last five years. Also, the ELSS lock-in period of three years is typically much less than the 15-year lock-in for schemes, such as Public Provident Fund (PPF).

Before taking the plunge, check the performance of various ELSS, as your capital may erode if you end up with a poor choice of fund.

We recommend Franklin India Taxshield and Canara Robeco Equity Tax Saver. Invest in not more than one or two tax saving mutual funds.

For example, say you have Rs 1.6 lakh and desire a 75 per cent (Rs 1.2 lakh) allocation to equity. You should invest Rs 40,000 in tax-saving fixed return schemes, such as VPF, PPF or NSC, and invest Rs 60,000 in ELSS.

Regular mutual funds offer advantages such as more choices, more themes and typically better returns compared to ELSS schemes.

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