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What rationale do you adopt while making an investment?
As in whether you invest to save your taxes or you plan your tax saving structure and then you invest.
Let me tell you, most of us believe in investing in those products that result in tax savings.
We forget the essence of proper investing.
If a particular product gives us attractive tax incentive features, we find it to be apt enough and we proceed with making an investment in those products.
In an attempt to save taxes, we forget the returns that we may or may not fetch from the investment made.
For instance: Mr. A invested in a Government scheme, giving 100% tax exemption for the investment of a minimum of Rs. 20,000/- for a lock-in period of 5 years.
Without even giving a second on other options available, Mr. A found the “tax saving” element to be apt enough to suit his investment requirement because he was being benefitted by the tax saving element.
Mr. A had the motive to invest, wherein he can get suitable investment product with suitable returns but landed up in tax saving product with NIL returns.
This is the common mistake that we all make.
Like Mr. A, we purchase those products that save our taxes, irrespective of the returns they may or may not get from the same.
Investment or tax saving – Where is the problem?
The problem lies in the fact that we are not aware of our requirements.
We respond to the products without knowing about the typical features of that product.
Lock-in period –
Most of the tax saving products carry a minimum lock-in period.
This means that for a certain period of time, the investor will not be able to break that investment.
In one year, an investor invests a particular amount in a tax saving investment product which is suitable for that year and affordable.
Whereas the investment product may carry the feature of investing the same amount year to year and which may not be affordable for the investor.
This is one of the major problems faced by the investors.
They are caught by such tax saving products wherein the liquidity issues come in.
This happens when the investors invest in a particular product, without considering the disposable income in their hands and face liquidity problems.
Plan your investment structure and then try to fit in your saving requirements.
Do not overweight your portfolio with the barrage of tax saving products.
It’s fine if you can avoid taxes, but mere saving your tax should not be the sole purpose of investing.
Tax saving should not be a primary objective. In fact, tax saving should follow investment and not vice versa.
So in case you are following a reverse psychology, rejig your investment structure and enjoy the benefits of both investment and appropriate tax saving products as well.