Check net returns before investing

One of the most important things investor should be aware of is the net returns they will get out of their investments. Investors need to understand the exact return their investment is making. But this is not taken in to account quite often.

In fact, this is very important and often missed. Let me give you an example to explain the concept of net returns (which includes pre-tax and post-tax returns).

One of my friends recently threw a birthday party for his daughter and felt agitated while settling the bill at the famous restaurant chain where the party was organised. The problem was the amount he was asked to pay as against the offer he received from the restaurant. The actual offer was to provide the complete meal set for Rs 99 only due to an ongoing discount offer on booking confirmation for a minimum number of of 100 packs, which my friend availed. He was clear in his mind to make the payment of Rs 9,900 to the said food joint, but the final bill came for Rs 10,890 which was inclusive of 5% GST and 5% service charge. He was surprised to see the amount which was up by 10% and ended up arguing with the restaurant manager who said that that taxes and service charge is always exclusive of any offer price as per the policy. Hence, they were not charging anything extra on their committed offer price. Not only this, the manager at the food joint also made one interesting point, by saying that tax money is not going to his pocket but ultimately, they need to pay it to the government.

Now there are two points I want to highlight through this incident. The first is on the taxes and the second is about your net outflow. In the above example, my friend did not take in to account the implication of tax and the surcharge which impacted his spending. In fact, the tax rate could have been even more, say 18% or so. If that was the case, then the total outgo would have been substantially higher. So, the manager or the restaurant may not be wrong in the way things are promoted and dealt with. Customers need to understand what is going out of their pocket and what is coming in. It is similar to the "take home salary" concept. A salaried person never accepts a seemingly lucrative job offer as given in the proposed "CTC", but calculates the final in-hand salary, after taking into account all deductions, including taxes.

The other point is about the mindset. When the manager said that the money collected towards taxes and not the restaurant chain, how would it change anything for my friend with respect to his spending. My friend's overall expenses went up and that is what he needed to factor in.

Investors need to understand the similar impact on their investments. For example, you invest money in Fixed Deposits or Public Provident Fund. Let us assume that both options offer 8% returns. Tax is applicable on FD, while PPF is tax free. The tax deduction on FDs could be 10, 20, 30% or as almost 35%, based on your tax slabs. This makes the approximately 8% offered by PPF a better investment than 6.60% post-tax FD interest.

Similarly, there could be other charges inherent in other investment products. You need to focus on understanding net returns like take home salary concept.

The writer is chief gardener, at Money Plant Consultancy