In a few days, the Union Budget will be presented by the finance minister of the country. Like in all previous years, there is bound to be a lot of noise about what the budget will have for common people like us.
You might be excited that some common-man-friendly announcement might be made or you may be worried that some new unfriendly measures might sour the budget for you.
But in reality, do budgets really matter when it comes to your investments?
To say they don’t matter would be wrong. After all, the tax rates and rules are announced in the budget and these do impact how your income, capital gains, etc. are taxed and how much you can save on taxes by utilizing the available instruments and strategies.
However, when it comes to managing your personal finances properly, there is much more to do than just looking to save taxes.
Investments not just about taxes
I will go on to say that saving on taxes should be a desired side effect of a well-thought-out investment strategy. Just saving taxes should never be the sole aim of your investments.
Think about it. Should you be asking how much tax you saved this year or should you be focusing on how much you saved this year for your child’s higher education needs?
People don’t realize that, eventually, only our financial goals matter more. You might beat the market for a year, or find a tax-efficient strategy due to a budget announcement in another year, etc. But will it help you get closer to your financial goals?
You can’t tell your child that you were busy saving taxes when they ask you to pay for their college education fee and you come up short. It’s a non-negotiable and you have to come up with the money.
The same can be said for something like your retirement. You just have one shot at it. And you can’t get your retirement strategy wrong. You won’t get loans for retirement and your kids cannot be your retirement plan. Think about it.
What I am trying to say is that as investors, we need to focus on what we can control. Like finding out what your goals are, how much these goals will cost, how much you need to save for these goals regularly, how much you need to increase your investments every year (in line with the increase in your income) so that you increase the probability of achieving your goals.
Of course, it’s in your best interest to pick products that are more tax-efficient. But that doesn’t mean that you invest in the wrong products just because you can save some additional tax.
Get your finances in order
For example, let’s say you don’t have an emergency fund in place. Now, you also want to save taxes this year. And you end up parking Rs 1 lakh for emergencies in a tax-saving ELSS fund. That would be wrong on multiple fronts. First, ELSS funds invest in equities that aren’t suitable for parking your emergency reserves. Second, ELSS funds have a lock-on of 3 years. So you can’t have your contingency fund (which you might need at a day’s or few hours’ notice) parked in illiquid instruments.
You cannot bank on union budgets to plan your investments properly. A budget might offer a tax sop here or take back existing ones somewhere else. But your goals stay as they are and remain unaffected by the budget. Don’t they?
Given the on-going pandemic, the new Budget 2021 might incentivize savings (or spending) through tax sops. But that shouldn’t alter your financial plans. It might require a bit of tweaking, but there won’t be any need for big ground-shaking changes.
If you are one of those who invest just to save taxes, then you are doing it all wrong. You may not realize it now, but that is the harsh truth. I am not saying don’t try to save taxes. All I am saying is that you should instead link your investments to your financial goals and, if suitable, then invest in products that offer tax benefits. It shouldn’t be the other way round.Also read: Tag tax-saving ELSS MFs to your financial goals.