In the wake of the coronavirus pandemic, the government has extended the deadline for tax-related compliances to June 30, 2020. These include making investments in tax savings schemes for FY19-20. The earlier deadline for the same was March 31, 2020. Investors can use the three-month extension to invest in tax-savings instruments and rebalance their portfolios according to the current market conditions.
The extension is a superb opportunity for investors and they should utilise it with due diligence, experts suggest.
Let’s understand in detail:
What is portfolio rebalancing and why it is done?
Rebalancing is the process by which investors can revisit their portfolio and gauge target allocation. It ensures that the investment portfolio is not dependent on the success or failure of a particular investment.
It is not necessary that what worked in the past, may work with the same effect today. The same applies to the investment portfolio.
“This is done by reinvesting the profits that are taken out of some of the outperforming investments and putting them in underperforming assets,” explains online investment platform ClearTax.
Investors can change their allocation in accordance with the change in current market conditions and other variables. Rebalancing can be done either by investing in new stocks, buying a new bond or parking wealth in high-return schemes, while discontinuing the investments that is no longer working.
How to choose new investments?
The criteria for choosing investments remain the same.
"This will be based on risk appetite and linked to financial goals," says Archit Gupta, CEO, ClearTax. Investors can rebalance their portfolios by seeing their current objectives and goals.
Where should one invest?
Taxpayers looking towards wealth creation with equity exposure should invest strictly in Equity Linked Saving Scheme (ELSS), Unit-linked insurance plan (ULIP), and National Pension System (NPS) as they are market-linked.
Given the market condition now, experts suggest that those who are comfortable with ELSS may consider investing now.
“It is an opportune time to go for ELSS as the investor can get units at a better value. Moreover, by the time, the lock-in period of 3 years would be over, the markets would have recovered,” says Sousthav Chakrabarty, CEO, and Director, Capital Quotient.
Harsh Jain, Co-founder, and COO, Groww echoes the same views.
"If we combine tax benefits with an opportunity to invest in the stocks of strong companies at a lower price, ELSS investments seem like a very good option. Offering dual benefits of tax saving and long term wealth creation, this is perhaps one of the best tax saving avenues available,” he explains.
Fixed deposits are good for those who don't want any risk exposure. But, they are less attractive today, according to Jain, because of the lowered interest rates, which are likely to go down further.
Gupta of ClearTax, however, adds that senior citizens who want to invest for shorter duration and are unable to venture out can consider the 5-year fixed deposit. A lot of banks allow making these deposits online.
On the other hand, those who are risk-averse may choose Public Provident Fund (PPF), which has a lock-in period of 15 years with a 7.1 percent rate of interest and annual compounding.
"Investing in PPF will also help in diversifying the portfolio," Jain says.
Other options to explore are National Savings Certificates (NSC) and National Pension System (NPS). NSC has a lock-in period of 5 years with a 6.8 percent rate of interest and annual compounding. The lock-in period of an NPS, on the other hand, is until retirement with a rate of interest of 12-14 percent.
Those who have a girl child, can also invest in Sukanya Samriddhi Yojana to raise corpus for her higher education or marriage needs and avail tax relief u/s 80C. The prevailing rate is 7.6 percent.
The extension is a superb opportunity for investors and they should utilise it with due diligence, experts suggest.
Let’s understand in detail:
What is portfolio rebalancing and why it is done?
Rebalancing is the process by which investors can revisit their portfolio and gauge target allocation. It ensures that the investment portfolio is not dependent on the success or failure of a particular investment.
It is not necessary that what worked in the past, may work with the same effect today. The same applies to the investment portfolio.
“This is done by reinvesting the profits that are taken out of some of the outperforming investments and putting them in underperforming assets,” explains online investment platform ClearTax.
Investors can change their allocation in accordance with the change in current market conditions and other variables. Rebalancing can be done either by investing in new stocks, buying a new bond or parking wealth in high-return schemes, while discontinuing the investments that is no longer working.
How to choose new investments?
The criteria for choosing investments remain the same.
"This will be based on risk appetite and linked to financial goals," says Archit Gupta, CEO, ClearTax. Investors can rebalance their portfolios by seeing their current objectives and goals.
Having a judicious mix of market-driven and fixed income returns, depending upon the investor’s profile, may enable investors to reach their desired goals.
Where should one invest?
Taxpayers looking towards wealth creation with equity exposure should invest strictly in Equity Linked Saving Scheme (ELSS), Unit-linked insurance plan (ULIP), and National Pension System (NPS) as they are market-linked.
Given the market condition now, experts suggest that those who are comfortable with ELSS may consider investing now.
“It is an opportune time to go for ELSS as the investor can get units at a better value. Moreover, by the time, the lock-in period of 3 years would be over, the markets would have recovered,” says Sousthav Chakrabarty, CEO, and Director, Capital Quotient.
Harsh Jain, Co-founder, and COO, Groww echoes the same views.
"If we combine tax benefits with an opportunity to invest in the stocks of strong companies at a lower price, ELSS investments seem like a very good option. Offering dual benefits of tax saving and long term wealth creation, this is perhaps one of the best tax saving avenues available,” he explains.
Fixed deposits are good for those who don't want any risk exposure. But, they are less attractive today, according to Jain, because of the lowered interest rates, which are likely to go down further.
Gupta of ClearTax, however, adds that senior citizens who want to invest for shorter duration and are unable to venture out can consider the 5-year fixed deposit. A lot of banks allow making these deposits online.
On the other hand, those who are risk-averse may choose Public Provident Fund (PPF), which has a lock-in period of 15 years with a 7.1 percent rate of interest and annual compounding.
"Investing in PPF will also help in diversifying the portfolio," Jain says.
Other options to explore are National Savings Certificates (NSC) and National Pension System (NPS). NSC has a lock-in period of 5 years with a 6.8 percent rate of interest and annual compounding. The lock-in period of an NPS, on the other hand, is until retirement with a rate of interest of 12-14 percent.
Those who have a girl child, can also invest in Sukanya Samriddhi Yojana to raise corpus for her higher education or marriage needs and avail tax relief u/s 80C. The prevailing rate is 7.6 percent.
First Published: Apr 2, 2020 5:21 PM IST
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