Are you a 'Papa Kehte Hain Type' when it comes to tax planning?

Like the seasons that change with your yearly calendar, we can say there are seasons that change with the financial calendar too.

This season seems to be the tax planning one. It is the time of the year when I run the risk of running into a species I call the Papa Kehte Hain Type or a PKHT for the sake of brevity.

You are a PKHT if you agree to any three of the following four statements:

*You have no or very little clue about how to make your tax saving investments

*Your tax saving investments are made by your father

*You have no clue regarding where your father is investing your
hard-earned money

* You feel that your father is investing your money correctly

So, if you are a PKHT, this piece is for you. There are several issues that PKHTs do not realise. Let’s deal with them one by one.

*Have no clue on where my father is investing my money: This is a dangerous situation. What if, God forbid, something were to happen to your father suddenly? How will you figure out where he has invested your money? Was he running a Public Provident Fund account for you? Do you know the post office he used to deal with? If he invested your money in fixed deposits, do you know with which bank? If he has made you invest in several insurance policies, do you know when their premiums fall due? Or do you even know the insurance agent he goes through?

My father is investing my money correctly: Why is your father managing your money? Is it because he has expertise to do so? Or is it just because he is the eldest in the family and has always managed the savings of you and your siblings — “Ab bhai unhone dhoop main baal to safed nahi keeye hain.” If he has some expertise, please go ahead and utilise his services. But if it is just a way of showing your respect to him, there are better ways of doing so.

Most fathers have very little idea of how to invest today. They are stuck in a time warp: Back when they started working, there were very few avenues of making tax-saving investments. The first thing most middle-class salaried men did after they had been working for a few months was to buy an endowment policy from a life insurance agent. And this is what most fathers of PKHTs do even today. At that time, there were no options. Today, it makes no sense to buy an insurance policy that gives you a return of 3-4% per year, after a period of 20 years or more. Inflation is likely to erode all the returns and on a net basis, you will end up where you started.

More than this, fathers who have all their lives invested in endowment insurance policies do not understand the importance real insurance i.e. term insurance. In a term insurance policy, in case of death of the policyholder during the term of the policy, the nominee gets the “sum assured” (or the life cover as it’s commonly known).

But if the policyholder survives the period of the policy, he does not get anything. This is something that doesn’t go down well with fathers. The point to remember here is that you need to be adequately insured and term insurance remains the best way to do that. So if you are the type who does not like risky investments, a combination of term insurance and PPF, which pays you a guaranteed return of 8%, remains the best way to invest.

Stock market is a bad thing: Anything to do with the stock market is bad. It is a gambler’s den. During the 80s and 90s, a lot of people lost money in the stock market due to scams. They still haven’t recovered from it. Take my father — he lost some Rs 50,000-60,000 in the vanishing companies scam of 1994. It took him at least another 13 years to get around to investing in the stock market.

It has been proved beyond doubt by now that the only way of making money over a long-term is by investing regularly in the stock market. If you are a PKHT, you won’t have realised this because your father would have told you a stock market is a gambler’s den.

Perverse incentives: Sometimes, other incentives seem to direct the kind of investment being made or at least, suggested. Sometime back, a colleague approached me and told me his father wanted him to buy a particular unit-linked insurance plan (Ulip) from a private sector life insurance company. Now, I am not a great fan of investing in Ulips.

They pay high commissions to the agents who sell them and other than that, it’s next to impossible to figure out which is the best-performing Ulip in the market. So, I told him to stay away. He told me his father was insisting that he invest. Some more digging told me that his father had taken up selling life insurance as a hobby after retirement. And he was an agent of the company whose Ulip he wanted his son to buy.

So I told my colleague to tell his father the commission charged in the policy was very high and he wouldn’t like to buy it. Prompt came the father’s reply, “But the commission stays in the family!” Now that is a very convoluted way of supporting your parents. If the idea is to help them, why not help them directly?