Tax is the most terrifying word for one who needs to pay it. There are many provisions in the IT act by which you can plan and minimize your taxes. One of the provisions through which one can reduce tax liability is by taking deductible from gross income to the maximum limit of Rs.100000 under Section 80C of the Income Tax Act. This can done by investing into life insurance policies, PPF, equity-linked saving schemes etc.

So where to invest to get deduction under Section 80C?

Let’s look at some basics and then we would be in a position to compare them:

An Endowment Policy is a traditional policy which has a risk cover policy for a specified period. At the end of the policy tenure the maturity benefit is paid off. The maturity benefit in this regards is the sum assured and the bonus accumulated during the term of the policy.

A term policy as the name suggests covers the risk for the particular term selected. It is the cheapest of all the life insurance policy, as it is the purest form of insurance the premium collected will not include any investment element in to it.

Public provident fund (PPF) there is a lock in period of 15 years with a minimum amount of Rs.500 and maximum of Rs.70,000 to be invested every year. PPF earns 8.00% p.a.

Equity linked savings schemes (ELSS) are basically a tax saving tool; which safeguards an investor from the short term volatility of the market. As it has a lock–in–period of 3 years. It is a high risk, high return investment. The asset allocation of an ELSS would ideally be 90–98% equity exposure and the balance may be in money market or government security. This makes an.

In an endowment policy the liquidity is blocked for the tenure of the policy and you miss out on the opportunity of booming economic conditions. One more negative which is associated with the endowment policy is that the bonus which is declared in the financial year is not compounded and investor is paid only the actual amount of bonus received in the subsequent financial year at the time of maturity. In case you surrender your policy you get a surrender value after paying a certain surrender charges for it.

On the other hand if you purchase a term policy along with a PPF or a term policy along with ELSS you will get a better return on your investment as compared to an endowment policy.

Let us understand with an example. If you take an endowment policy with a sum assured of say Rs.10 lakhs for tenure of 20 years. The annual premium payable would be Rs.47,000. If you buy a simple term life insurance policy for the same sum assured i.e. Rs.10 lakhs for 20 years the annual premium payable would be Rs.2920. The balance of the premium i.e.Rs.44,080 (47,000 - 2920) if invested yearly in PPF for 20 years at 8%p.a. the accumulated amount would be Rs.20,17,187. In other case if you invest the difference of the premium i.e. Rs.44,080 on a yearly basis in ELSS which gives you a compounded annualized growth rate of 12.00% p.a. the accumulated amount would be Rs.31,76,072.

A risk-averse investor should look in for a term insurance along with a PPF option. A risk-liking investor should look in for a term insurance along with an ELSS option since ELSS is more aggressive - its inclination is mainly into equity investments which yield better returns in a longer tenure, beating inflation.

Unit Linked Insurance Products popularly known as ULIPs are the most selling product in the Insurance market. Almost half of the Indian public invests in to ULIPs. They sell like hot cakes in the Indian markets with their promise of giving market linked returns combined with the benefits of insuring your life in case of any unforeseen events.

To describe ULIPs further, they have four or more types of funds they invest into. The investor has an option to invest into which ever fund he wants to invest into. This depends completely on his risk taking ability and time horizon of investments. The most risk taking individual can opt for an option which allows him to take 100 per cent exposure into the equities market, where as the most risk averse investor also has an option of putting the entire amount into the safer instruments. The key issue over here is to match the right asset allocation to the right risk taking ability in accordance with the time horizon of investment.

Along with this feature of ULIPs, you also get an option of switching in between funds. Generally you gets four to six free switches per annum. After you exhaust the free switches you have to pay per switches. Say you chose a fund with 100 per cent allocation towards equities. You have been invested into this fund for almost a year now with the equity markets performing amazingly well. Now you think you have made enough and you think you prefer shifting a part or whole of your corpus towards a less risky portfolio. You have an option in ULIPs where you can choose to move your portfolio into 60 per cent of equities and 40 per cent of debt.

Does the above give you an impression that I am asking you to time the markets? No, because I am a firm believer that no one can perfectly time the markets. The strategy to be applied here is to do a goal planning in which you state that this year you want a return of say 20 per cent per annum. Now as soon as your portfolio in to equities shows a return of 20 per cent even if it is only two months from the date of investment, you should shift at least 50 per cent of your portfolio into debt instruments by using your switch options.

For deciding when to switch, you should keep the following in mind:

• Goal Planning: The entire process is how you manage your finances depends on the goals you have in your life in terms of money needed for the same and what rate of return you have to get to achieve your goals. If you have already collected enough money to reach your goals then you should switch your money in to less riskier options.

• Asset Allocation: This is probably the most important thing to be kept in mind when you plan your finances for the future. The key is to get the expected returns by striking the right asset allocation and diversifying your portfolio. Any time your desired asset allocation changes by huge margins, you should use your switch options to match it over again.

• Risk Appetite: The process of goal planning and asset allocation depends on the risk appetite you have. You should always try to analyze how much risk you can afford to take. In case your risk appetite says an asset allocation of 80 per cent in equities and 20 per cent in debt, then you should never invest in to 100 per cent equity fund. You should switch as soon as your equity portfolio grows out of proportion in comparison to the debt part.

• Time Horizon: Time horizon is very important. The closer you get towards reaching you goal you should keep moving your portfolio in to safer options rather than too much of equities.

Abhishek Kumar Singh is a Certified Financial Planner working at ApnaPaisa Services Pvt. Limited.

Often people talk about asset allocation within various investment classes like equity, debt, real estate, gold etc. Your financial advisor draws up the plan for you and you sit very comfortably with an asset allocation of 60 – 30 – 10 which means 60% of your portfolio goes in to equities, 30% in to debt and the remaining 10% in gold. For debt you invest into post office or you buy fixed deposits. For gold you go and purchase gold biscuits or ornaments from the markets. Now the question here is how to go about the 60% of the portfolio which is supposed to be invested in to equities according to the financial plan. Buying equities is not as simple as buying gold and or buying fixed deposits.

The first step to be taken here is to decide if you want to invest directly in to equities or want to go the mutual funds or the portfolio management services (PMS) way. The minimum investments in to mutual funds are around Rs. 5000 whereas in PMS it is Rs. 5 lakhs. If you are not very comfortable with ratios and balance sheet then the best option is to leave it in the hands of experts. Mutual Funds or PMS are the best way to go for you.

But before you invest in to mutual funds, PMS, or directly invest in to equities you should think if you should invest in to large caps, mid caps, small caps or a mix of all of them. The risk return matrix of the equity classes can be explained as follows:

Large Caps – established companies, successful business model, so low risk, low returns
Mid Caps – yet to prove themselves but already in the process – riskier than the large caps, so returns will be higher
Small Caps – new entrants in the markets, they are called the babies of the markets – high risk, high returns.

The asset allocation to be done within equities has a lot to do with the risk taking capacity of an individual and doesn’t depend too much on the time horizon of the investments even though the time horizon can’t be completely ruled out.

Comfortable time horizon for each equity class:

Large Caps – 3 years and above
Mid caps – 5 years and above
Small and Micro Caps – 7 years and above

Before drawing up an asset allocation within the equity classes it is very important to draw up your risk profile. You should contact your financial advisor for the same as it is a very sophisticated process and a simple mistake in the process can lead to defeating results. Mutual funds and PMS products are available in all the mentioned equity classes. You can visit various personal finance sites to see the best of mutual funds in each category. Your financial advisor can help you to choose the best mutual funds in the industry. In case of PMS the providers usually have products for each class. You can discuss it at length with the provider.

The author is a Research Analyst working at Apnaloan.com Services (P) Limited.