When I started on my first job, I didn’t know much about income taxes and how to save money on paying it. So I let my Dad to handle all my tax savings. There were many mistakes that were made as a result of that.
Buying traditional LIC policies
Technically my dad can’t be blamed for taking these LIC policies. Because thats what he did when he started earning. During those times Life Insurance Corporation of India was the only company which provided life insurance and it was the only way to save a bulk on your income tax.
That is no longer true as there are numerous other companies which provide Term Life Insurance with quite a large amount of life cover at very low prices. Spending almost Rs.45,000 per year on LIC policies to get the 80C deductions is a complete waste of money.
At least my dad invested in 5 separate policies in a staggered manner (one every year) and they were money back policies. So every year one policy will return back a portion of the money invested. This reduced the amount of outgo every year, as the cheque I receive from LIC will pay a part of the premium every year. This is much better than the endowment policy which gives your money only at the end of the term.
Investing in ULIP
ULIPs are a very bad form of investment/insurance. It is evident with all the mis-selling that were done by the brokers and SEBI finally putting in more rules. Rs.5000 was put in a Unit Linked Insurance Policy by UTI because my dad’s friend suggested it. The amount I paid every year and the life cover & returns that I got wasn’t worth it.
Both the insurances I had bought returns less than what inflations eats from my savings. Must’ve opted for term insurance and skipped all the other forms of insurances.
Investing in ELSS funds in bulk at the same time
ELSS or Tax saving Mutual Funds allow you to invest in equity and also save tax. The only restriction is a lock-in period of 3 years. I invested in about 5 ELSS funds in the end of year 2007 for a huge amount.
While investing in equities is a good thing, I made three mistakes here:
- Invested just when the market was touching its all time highs.
- Putting all the money at the same time. The goal I had was to save taxes – not invest the money.
- Investing in 5 funds is a bit too much. Especially when all 5 were ELSS funds and almost had the same goals. I didn’t diversify in the right way.
Result? The returns I received was dismal. Even though NIFTY/Sensex is back to its highs, the funds haven’t reached the old NAVs. Meaning I am still in negative.
Tomorrow I will write how I could have done a better job in the Mutual Funds by using something called SIP (Systematic Investment Plan).