How to choose the right tax-saving investment instruments in 2020

With the pandemic and the evolving scenario, investors are now re-thinking their portfolio, and tax-saving investments in 2020 may see a shift in priorities.

Under Section 80C of the Income Tax Act of India, you can claim a deduction in the taxable income of up to Rs 1.5 lakh for investments such as Equity-Linked Savings Schemes (ELSS), Public Provident Fund (PPF), and National Savings Certificates (NSC), amongst other investment options which are eligible for deduction.

Here are a few investment options that you can consider choosing in 2020, to save and meet your financial goals:

ELSS vs Stocks

Indian stock markets have witnessed volatilities in the past few weeks. Though some might say it’s only for the short-term, you need not be tempted to make hasty decisions. If you’re worried about losses, then you can opt for mutual funds for diversification and relative stability than stocks.

You could opt for equity-oriented mutual funds like ELSS, since they are also tax-saving and allow you to avail deduction under Section 80C.

Large Cap Funds Are Here to Stay

The markets may have taken a hit, but there’s no need to get spooked. You can consider staying invested for the long-term instead of thinking short term. History suggests that while markets may correct in the short term, in the longer run they always reward with handsome returns. A safe yet stable mutual fund option is large-cap funds which invests in large companies.

These equity-oriented funds aren’t part of tax-saving investments, but in 2020 you may want to consider purchasing them. During market turbulence, while some small to medium enterprise stocks may take a hit, large-caps tend to remain largely stable. If you’re looking for some equity participation with a consistent performance and a long-term investment horizon, you should consider these funds.

It’s Time to Take a SIP

Whether you opt for large-cap funds or ELSS, you should have some investment during COVID-19 that will give stable returns. Another way to ensure maximum gains with diversified risk is to choose a Systematic Investment Plan (SIP) over a lump sum payment.

With an SIP, you can benefit from rupee cost averaging, where during bearish markets, you can get more mutual fund units. These will potentially gain momentum when markets turn bullish. Investing in SIP, continuing the course, and in fact adding to the corpus in times of downturns has proven to be rewarding in the long term.

In uncertain situations, it can be challenging to make any kind of investment decision. It is good to have a mixed bag of investments after weighing the risks, taxation, investment timeline and your financial goals. One way of dealing with investments during COVID-19 is by not creating a situation of panic. You need to view your investments like marathons and not sprints.

So, hold on to your existing mutual funds, and if you haven’t started mutual funds and other tax-saving investments in 2020, now would be an opportune time to start. This short-term turbulence can be an opportunity for long-term growth.

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