Investing without the tax nudge

The personal taxation proposals in Budget 2020 caused a furore. In the last few weeks, there have been umpteen articles on which regime is better, whether dividend distribution tax was better, etc. The government has now clarified that they do not believe that Indian taxpayers need a policy nudge to save.

Sadly, the reality is very different. Most taxpayers save in instruments, which provide a tax deduction. I also noticed from my sessions, that beyond investing for tax purposes, individuals were not saving much. And this is putting their financial wellbeing at risk. All this while, at least due to tax benefits, people were putting some money away. Now with this gone (if one is going with the new regime), individuals will certainly have to spend more time on their finances.

First, they would need to clear money misconceptions, like thinking that a good salary means financial security. With the big salary come higher expenses even on essentials like housing, schooling, etc. Many high earners tend to take large loans and a significant part of their salary is tied up in loans.

A high salary also makes individuals believe that things will work out. The second money misconception is about retirement savings. Try talking to a millennial about retirement savings and see their reaction. What they do not realise is that they need to be saving the maximum possible now not only to benefit from the compounding but also keeping in mind job insecurity.

Not diversifying, trying to time markets and expecting quick returns are other money mistakes which investors make often with market-linked investments. Not understanding risk is a huge issue. Else, one wouldn’t find investors having a majority of their wealth in a cooperative bank or all sort of Ponzi schemes, which promise very high returns. Even with mutual funds, the tendency is to choose a fund based on near term performance and then crib about the low returns the fund gave. Then there are a big number of risk-averse investors, who will stick to traditional investments, as they are too scared of losing money. A couple of years back, I had helped a friend with her financial planning. Just recently, I got to know that she didn’t implement the plan simply because she chose to believe an insurance agent, who assured her that endowment policies will double money in 4 years and are guaranteed with a 15% return. Whereas, I gave her no assurance on returns from mutual funds.  Turns out that her entire portfolio is in endowment policies and fixed deposits and the few SIPs she had started have been redeemed, as “they were not doing well”. She invested the redeemed amount in the gold scheme of a local jeweler, as it gave high fixed returns. Essentially, she made all the investment mistakes possible.

While my experience as a financial educator and advisor doesn’t show that taxpayers take the right investment decisions, I am happy that finally investors will be forced to move away from thinking only about tax deductions.

Here are some things investors need to keep in mind while investing:

It is essential to gain knowledge of personal finance. No longer can you rely on friends and family or simply invest in tax savings products. Engage with a fee-based financial planner to create a structure around your finances and to ensure you don’t make the investment mistakes highlighted above. The planner will also help keep you on track to achieving your financial goals, by being your accountability partner as well.

Focus on tax efficiency, which means investing in instruments, which are taxed at a rate, lower than tax slab.

The government must also increase its investor education efforts to get household savings to start growing and household debt to decelerate.

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Photo Credit: Deccanherald

Source: Article written by Mrin Agarwal in Deccan Herald

Originally published on: 10 Feb 2020

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