This investment guide is based on investing via Mutual Fund – Tax Saving Policies. This is not an article which you would have read in a newspaper or some magazine.

Please NOTE: This article is based on Indian Context

TV and the exposure to the media you get nowadays would have sure got you dreaming big. It had so much impact on me that my parents say Lamborghini was the first word I spoke.

I am sure everyone has a different kind of a dream to own something like a Ferrari, a Yacht, a Bungalow or even an Island. At the same time you have heard your parents, relatives or even friends have said we can only dream of having all those possessions. 

Dreaming big is good. Never stop dreaming big just because you are de-motivated by the comments you hear. This article is basically intended for fresher’s who have a job in hand or have just started out there. Am sure you would have heard the grown up speak about doing various things they have done to save on taxes or bought some kind of policies to save money for the future. Well I used to wonder why should not we enjoy the day to day existence first and spend lavishly and make life a big party.

Recently I got my first financial advice 6 month short of me finishing up graduation and starting out to earn my own money.  The main reason I am writing this article is to share the things I learnt which proved my Party Lifestyle wrong to an extent and gives a win-win to the millions of people who save for the rainy day.

As you know once you start earning you guys have to apply for a PAN (Personal Identification Number) card and start filling taxes from the same financial year. Almost 50% of your earnings are taxed by the government. Initially up to 33% on your salary and everything you buy is also taxed by VAT (Value added tax). Bellow is the matrix on how you are taxed directly on the income.

Income Tax %
Upto Rs 1,50,000/- NIL
Rs 1,50,000/- to Rs 2,50,000/- 10%
Rs 2,50,000/- to Rs 5,00,00/- 20%
Rs 5,00,000/- and above 30%

Because of the well paying jobs these days most of you fall under the last two categories paying a min of 20% of your income as tax.   Now let us talk about the ways you can save taxes and what exactly you get in return for doing so. We can invest in few things like Mutual Tax Saver fund, Life and Medical Insurance, NSC (National Savings Certificate), Pension plan, take a housing loan.

Given Below is the Amount you can save from the above methods.

Method Savings
Provisional Fund, NSC,
Mutual Fund Tax Saver, Pension plan1
Rs 1,10,000/-
Housing Loan Rs 1,50,000/-
Medical insurance Rs 15,000/-

1 All together should add up to the sum show
*All are annual figures

SIP (Systematic Investment Plan)

In SIP, we have many plan from which we can choose depending on the amount you can invest. Usually there is a 3 years lock-in period which means that from the month you start investing you canot withdrawn the money until the three years has passed by. Something like a Fixed Deposit but your investing certain amount of money every month.

Mutual Fund Tax Saver Plan

This scheme is mainly for the benefit of the people so that if forces the mass to save for the rainy day in the context of saving your taxes. These schemes are provided by many companies like LIC, Reliance, HDFC etc. In this plan you have to decide on investing a certain amount every month for 3 years.

You can get back the money only after three years. Some companies allow you to close the polices in the middle at a penalty and some do not. Verify with your Agent before you plan to buy it.

Consider your earning Rs 5,00,000 per annum that calculates to around Rs 41,666 per month. Below is a table I have formulated if you decide to invest systematically for 8 sets of 3 lock-in periods that is in total 24 years. Considering that you start investing when you are 25 years old and stop investing at around 49 years. This is just an example you may want to invest more number of years or less.

Year Lock-in
Per Month
Total Investment
per Lock-in
(3 Years)
Return from
per Month
Total Investment
per Lock-in Period
2009 1 2,000 72,000 0 0  
2012 2 6,000 2,16,000 4,000 10,000 360000
2015 3 5,000 1,80,000 20,000 25,000 900000
2018 4 5,000 1,80,000 50,000 55,000 1980000
2021 5 5,000 1,80,000 110,000 115,000 4140000
2024 6 10,000 3,60,000 230,000 240,000 8640000
2027 7 20,000 7,20,000 480,000 500,000 18000000
2030 8 0 0 1,000,000 1,000,000 36000000
      1,908,000     72000000

(* Considering an avg 100% according to the scheme)

I am sure your confused reading the above matrix. Let me explain it for you guys. Let’s say you started investing Rs 2000/- every month from Jan 2009 with a lock-in period of 3 years. And taking the fluctuations of the market conditions let’s just take our average return in these lock-in as 100% (you can get more than 100% or less than 100% during that particular month).

Now you are thinking how I can say you will get 100% return even during the recession period all round the world. Well looking into the History of the world in Finance, we can observe that the state of recession is not permanent and that every 10 years there’s a downside in the market.

Neither the Up Trend nor the Recession is a permanent situation. So if you started investing 2000/- every month towards the mutual fund for the first lock-in period you will be spending a total of (2000 * 12 * 3) 72,00/-. But according to how mutual fund works the money you invest in Jan 2009 is only returnable in Jan 2012.

So the return on every month’s investment takes three years from that month. So when you start your second lock-in period investment in 2012 Jan. You will have your first return from Jan 2009 which we will assume has doubled and has become 4000/-. So now if you’re willing to invest 6000/month in this lock-in period and reinvest the return back into the mutual fund then you are investing a total of (6000 + 4000) 10000/-.

Now the return from this is only available to you in Jan 2015. If you repeated invest like these nominal amounts for 8 lock-in periods you will see the above matrix coming into picture. Reminding you that the main reason you’re investing is for tax benefits.

If you had not invested most of the money would have been paid as tax and added to that your saving money for the future. If your investment is systematic for a period of 25 years according to the assumed sum you will be investing a mount added up to 19,08,000/- (19 lakh).

Wow that is a lot of money but see the return you will get for investing systematically to save on the taxes. It is a Whooping 7,20,00,000/- (yes your seeing it right – its 7.2 cr.). Come even if you consider our calculations has gone wrong by 20% you will still have a return of around 5.76cr. This is the result of investing systematically.

Now given the figures you start think if the companies you buy the policies from closes down. Well that is the reason you should prefer to invest in government regulated companies like LIC, State Bank groups because if anything happens the government steps in to help. I am not against any company for that matter, May be you will get better returns from private companies and your money secured there too. The point i am trying to convey here is think smart and invest instead realizing it late in life.