Now's the time to start tax-planning

To begin with, let's discuss some by now 'familiar and reiterated' facts. Equity markets are at record highs and equity-oriented funds have clocked incredible returns over the last three years.

Confidence levels among investors have never been higher and mutual fund schemes have emerged as the most favoured investment avenue.

Now for the interesting part. We have a solution for the question that most investors are grappling with, "Where should we invest now?"

Equity linked savings schemes (ELSS), or tax-saving funds (as they are commonly referred to), are an avenue that should be high on investors' priority list at present. Such funds offer tax benefits under section 80C and have a three year lock-in.

While the tax benefit effectively lowers your cost of acquisition of such funds, the lock-in will instill discipline and thereby benefit you (equities in our view do well over a minimum tenure of 3 years).

Our recommendation is that the investments be made via the systematic investment plan (SIP) route. The objective is to minimise the risk of mis-timing the market.

Conventionally tax-saving investments in schemes like Public Provident Fund (PPF) and National Savings Certificate (NSC) were made at the end of the year (January to March period). Given that these schemes were of an assured return nature, the timing of the investment was irrelevant.

However mutual fund schemes present a different scenario, thanks to their market-linked nature. By spreading ELSS investments over a longer time period, investors stand to benefit on account of rupee-cost averaging. Simply put, by making investments across diverse time periods, the investor can "capture" the various highs and lows in the market. This in turn, will lead to an averaging out of the cost of acquisition of mutual fund units thereby minimising the risk of mistiming the market.

Although markets have risen sharply in recent times, the same has not been without its fair share of volatility. An SIP could just be the solution. Here's how:

• An investment made using the SIP route offers you the benefit of rupee cost averaging.
  

• SIPs do away with the need to time your entry in the stock markets. So, you do not have the headache of always having to watch a business news channel to decide when to invest!
  
• Finally, the SIP route is lighter on the wallet. Instead of making a lumpsum investment in tax-saving instruments at the end of the year, the investor in an SIP invests in smaller portions at regular intervals.

However, the SIP mode of investing could have its negatives as well. If we were to assume that markets will have a secular Bull Run from here on, an investment made using the SIP route may work out to be more expensive vis-à-vis a lump sum investment.

In our view, the positives of investing in an ELSS using the SIP route comfortably outweigh the negatives of such an investment.

Our recommendation for investors -- if your risk appetite permits making investments in tax-saving funds and the same is in line with your asset allocation for tax saving instruments, now is the time to commence an SIP in a tax-saving fund.