Investing in safer instruments? Don’t ignore Tax

All of us want our money to grow but not many of us give much thought to taxes while making investments. The fact that millions in our country still rely on traditional instruments like bank deposits and small savings schemes to invest their money testifies this point. These instruments not only give low returns but also are fully taxable. Clearly, the main attraction is the “safety” provided by these instruments. Though, it is quite natural to be concerned about the safety of one’s hard earned money, by giving too much importance to this aspect we do not allow our savings to grow at a meaningful rate.
While tax efficiency alone should not drive the investment strategy, it can make a substantial difference to your portfolio’s ultimate size. In other words, tax efficiency has to be an essential element of any investment plan along with portfolio mix, investment philosophy and management. While paying taxes when necessary is understandable, paying more taxes than necessary is not! The ultimate objective of investing should be to fund your current and future requirements by maximizing your returns in a manner consistent with your means, future needs and risk tolerance.
The tax efficiency becomes even more important when one intends to invest in safer instruments offering predictable returns. Mutual funds, as an investment vehicle, are one of the most tax efficient ones. Besides, they offer variety of products in this category to suit the needs of investors depending on their time horizon like liquid, floating rate, short and medium term debt funds, Fixed Maturity Plans and arbitrage funds. Let us understand as to what each one of these offers and how tax efficient they are.