Most people in India who fall under the taxable income bracket, do whatever it takes to complete their investments of 1.5 lacs to save tax under Sec 80C. And in the process, most of these investments are directed towards traditional life insurance policies, tax-saver fixed deposits, Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS).
While it is a good thing to save money and minimize tax outgo, these investments are not enough to create wealth.
If you ask anyone from Gen X (born between 1965-80), the first advice they would have received from their parents after starting their career would be “Beta open a PPF account and start saving some amount in it every month.”
This is because that is the advice they received from the elders in their family. Decades back, this was good practice as PPF used to give interest as high as 12% in the 80s and 90s. Now the average returns of PPF range between 7.5 to 8%. Besides earlier, not many were not aware of the process of investing in the share market in India or the benefits of the same.
But times have changed. Investing in the share market in India has become quick and easy, and anyone can do it instantly using a smartphone or a computer.
Life insurance another popular option to save tax under 80C is often mis-sold as an investment product, whereas in reality, it is not an investment product. Most traditional life insurance products, including whole life, endowment and money-back policies, offer low returns in the range of 4 to 6%.
It is not that one should not invest to save tax. One should try to save as much tax as possible. But apart investing for saving tax, it is also essential to invest to create wealth. And to create wealth share market investment is the best.
To help you better understand this, take a look at the below table:
|
|
Initial Investment |
Value of Investment | ||||
|
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
80 C investments |
100000 |
108010 |
116661 |
126006 |
136099 |
147000 |
|
Equity |
70000 |
91007 |
118317 |
153823 |
199985 |
260000 |
Assuming 8.01% CAGR Returns in Life Insurance/PPF/tax-saver FD & 30.01 % CAGR Returns in equity over a 5 year term.
As you can see from the above table share market investment can beat other investments like life insurance, PPF and tax-saver FD’s hands down.
Now you must be wondering then why not ELSS instead of share market investment? After all it is also an equity investment and helps you in tax-saving too. Right?
Well, yes ELSS are diversified equity mutual funds which invest in equity and equity-related securities, but they suffer from the same drawbacks as other categories of mutual funds.
Drawbacks of mutual fund investments
No control over the portfolio
When you invest in a mutual fund, you don\’t know exactly where your money is getting invested and in what ratio. Besides the total control of your portfolio rests with the fund manager who runs it.
Over-diversification
Over-diversification is another problem with mutual funds. There is no doubt that it is essential to diversify your portfolio, but over-diversification has its pitfalls. Most mutual funds hold anywhere between 30 to 50 stocks or more in their portfolio.
As the number of securities you hold goes up, the risk becomes low, but potential gains will also reduce considerably.
You can’t average during market corrections
Your mutual fund portfolio may contain outperformers and non-performers. When the market corrects significantly, you cannot pick more quantity of performing stocks even if you buy additional units of the mutual fund as your investment gets divided among different types of stocks.
Moderate returns
The returns of your mutual fund investment depend on the fund manager’s skill and judgment. It is a well-known fact that very few portfolio managers can beat the market to deliver consistent returns.
Besides this, there are several administrative and fund management charges which also reduce the overall return on your investment. Do keep in mind that these are chargeable irrespective of whether your fund performs well or not.
On average, the returns generated by mutual funds range between 12 to 14% in the long term. But if your objective of investing in mutual funds is to capitalize on the high returns of equity, doesn\’t direct share market investment make more sense
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Share Market Investment In India Is The Best Investment To Create Wealth
In terms of returns, right from inception share market investments in India have beaten all other asset classes by a considerable margin. Apart from generating double-digit gains in the long term, it is the only asset class which can beat inflation.
So coming straight to the point no matter how much you save under Sec 80C instruments, it can never create wealth for you. Hence you must save at least some portion of your investments in the share market in India too.
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Related investing topics
Read more: How Long-term investing helps create life-changing wealth – TOI.