Milking the Greed – Beware.

What is your expectation of returns from the investment ?  No, I am not talking about the “Real” Return (Interest minus Inflation), I am talking about the expected returns from an investment.  I know people feel that 20%-25% is the returns expected from an Equity investment and they have less expectation from other areas.

Is 20-25% achievable in equities ?  You may have certain years that has given you that returns, but the reality is that keep your expectation lower, I would say, keep it around 10-12% maximum, and the returns are bound to reduce even further with easing of interest rates and other factors.  Anything more than that, I call it greed, and with greed you tend to fail in planning properly.

See, a simple mailer from freecharge which has come to my mailbox.  The mailer says you can save tax up to 46,350 by investing in Tax Saving Mutual Funds (ELSS).  The mailer also says that you get 42.6% Annual Returns (Eh, yes, Annual Returns) from these mutual funds.  It also says that the maturity amount is tax free.

How the “greedy side” of the brain of an unsuspecting investor works:

The Greedy side now starts looking at this, when the expectation on equity is 20-25%, this mailer offers me an investment with 42.6% annual returns. Wow…  Maturity amount is completely tax free and also I get to save a cool 46,350 on tax.  Lovely proportion.

Now come to the fine print.

The fine print says (and the fine print is really fine print in the mailer), “Based on the average of 1 year returns as on 15th Dec, 2017 of Top 5 ranked ELSS Mutual Funds as per CRISIL Mutual Fund Ranking (30th Sep 2017).”  Not bad… still attractive, perfect lines for a person to fall..  The next sentence though will slightly take a person back, but not enough to stop him from committing, “Past returns may or may not be sustained in future.”  Standard lines, must invest, the greed says…

Third point in fine print says, “*** No Long Term Capital Gains Tax for upto Rs 1,00,000 of gains.”   Looks good, gains upto 1 lakh is tax free… Great investment.

Reality:

Let us look into the points one may miss here.

1. First and foremost, let us assume that the last year returns was 42.6%.  Will you be able to enjoy it?  No, the lock in period is 3 years.  So, you never know what would be your returns after 3 years.  Did the mailer give you the returns for 3 years, No.  They just want you to invest through them.
2. Secondly, is this your only investment that saves your tax?  No, there would be your normal provident fund and other insurance policies that sums up in 80C to save tax.  So, saving of 46k is real bull….
3. Thirdly, the returns was tax free, but if you are a regular investor, plan for paying some tax.  This will not be your only redemption during any year and it will be based up on your goals and needs.  So, ignore the “Tax Free”.  That will not work in future anymore.  Consider the tax impact on your return on investment.

So, base your investment on your goals and not just tax saving.  Keep your expectations to the minimum and plan accordingly.

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