Accounting

3 types of tax saving investments that help diversify your portfolio

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A smart investor is one who diversifies his risk by diversifying his portfolio. In the case of portfolio diversification, an investor invests in different entities to reduce the various types of risks associated with an investing capital.

An investor should always go for totally opposite types of funds. Hedging your funds in different sectors safeguards your over-all portfolio returns. It is because if you invest your money in different stocks, there are chances that even if the price of the stock in the market rises or falls, the portfolio as a whole will not give you a negative return.

As an investor, you should not only be concerned about your return on investment but also take advantage of those schemes by diversifying your capital in various tax saving investments. Always remeber: gaining without saving is not a smart way to invest. If you need more information regarding tax saving investments, you can visit https://scripbox.com/plans/tax-saver-plan.

Three tax saving investment variants to diversify your investment portfolio

The following are the three types of tax saving investments you can explore:

ULIP (Unit Linked Insurance Plan)

ULIP is a combination of both insurance and investment domains, therefore, termed as a hybrid product. When an investor pays a premium, part of it remains invested in both equity or debt security as per the investor’s choice and the remaining portion is secured to provide insurance coverage. The best feature of ULIP is that an investor can choose the proportion of funds to make the investment in a combination of equity and debt. Moreover, an investor can change this proportion any time till the maturity.

The maximum duration of ULIP can be fifteen to twenty years. But an investor can withdraw his fund after five years without paying tax. Under Section 80C, deduction switching between the funds or return on maturity is also tax-free. If an investor wants to meet long term goals, ULIP can be a wise option.

Equity-Linked Savings Schemes (ELSS)

ELSS is diversified equity provided by mutual funds in India. Investment up to Rs. 1.5 lakh is exempted from tax under Section 80C, and the surplus money is kept invested with a lock-in period of 3 years due to which it is known as a closed-ended product. After the completion of 3 years, it becomes an open-ended product, which gives you the right to withdraw.

The return on ELSS is dependent on the performance of equity shares due to which the return is not fixed. An investor can invest his money in the form of SIP (Systematic Investment Plan) or invest a lump sum money at a time. One can choose a dividend option for regular income. However, on dividend income, an investor needs to pay DDT (Dividend Distribution Tax). It is preferable to keep invested in ELSS at least for seven years.

Public Provident Fund

PPF is one of the popular types of tax saving investments which is a long term scheme with a minimum duration of 15 years, which you can extend by investing in the block of 5 years. The maximum amount you can deposit under this scheme in a year is Rs. 1.5 lakhs. It is better than any fixed deposit scheme as it offers inflation-adjusted returns. Rs. 500 is the minimum amount one needs to pay in a year to keep his PPF account active. The drawback of PPF a/c is that the investor can withdraw money after completion of the sixth year and partial withdrawal is permitted at the end of the fourth year. The PPF a/c will be closed on the maturity date or on the expiry of the account holder. The redemption amount, including earning on interest is tax-free under Section 80C.

These were some of the best tax saving investments that will provide you with a tax-free return. One can go through the features in detail and then, form an informed decision.

About the author / 

Robert B. Wilfong

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