Tax Saving Mutual Funds

Mutual Funds are considered as one of the lucrative options of investment for investors who wants to accumulate fund over the long-term period and who have different risk appetite.  With the advancement of technology, access to mutual funds has become relatively easy. Now you can buy a mutual fund with few clicks.

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Moreover, to cater to the various requirements of the investors there are extensive range of fund options available in the market.

Mutual funds allow an investor to diversify their portfolio by investing in market linked securities like debt, stock, ELSS and equity funds. As per one’s own risk appetite the investors can choose to invest in these funds. Moreover, the investors who want to save n taxed by investing in mutual fund can consider investing in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). Further here we have elaborately discussed the different aspects of tax saving mutual funds, which you need to know.

*Tax benefit is subject to changes in tax laws.

What are Tax Saving Mutual Funds?

Unlike any other mutual fund, under tax saving mutual funds the investment are majorly made in equity and equity related securities with an objective to create wealth and provide high return on investment. The only difference is that these funds fall under Section 80C of the Income Tax Act, 1961, which exempts them from tax provisions and allows an investor to save tax (tax benefit is subject to tax laws changes) to a specific limit. Equity Linked Savings Scheme (ELSS) are best suitable for investors who have medium to high risk appetite and who wants to gain the benefit of high ROI long with the advantage of tax saving.

Features of ELSS

Any eligible person can buy the ELSS scheme to get the benefits related to tax exemption. Still, before you move ahead and get involved, you should know all the nitty-gritty attached to this scheme to avoid risks and other restrictions that come with ELSS. Here is the list of features linked with ELSS:

  • A significant portion of the overall investment falls into the equity market.
  • By investing in various equity funds, it can deliver fair returns to the investor.
  • Readily available to buy through both online and offline mediums
  • They come with a 3-years lock-in period.
  • One can either pay through lump sum or by SIPs.
  • The minimum limit for SIP is rupees 500.
  • There is no maximum limit to invest in the ELSS scheme.

Benefits of ELSS

Every investor wants to invest their capital in a scheme where they can get the additional advantages other than good returns. ELSS is one such scheme that provides an investor handful of benefits which makes it very attractive and lucrative. The advantages associated with ELSS are:

  • Equity Linked Saving Scheme has the lowest lock-in period, i.e., three years compared to any other open-ended equity fund. These ELSS funds are suitable for those investors whose only motive is to save tax over the period of time while getting good returns as a bonus.
  • Having a fixed lock-in period of a minimum of three years generates the habit of disciplined investment in individuals. If investors want, they can keep investing in it even after three years, thus ensuring good returns and even tax benefits on returns earned.
  • The investor cannot withdraw their invested amount during the fixed lock-in period, but they can only withdraw the dividend earned during that period.
  • Since the ELSS scheme is an open-ended equity fund, an investor can invest any time during the given year.
  • There is no upper ceiling to the limit of investment in the ELSS scheme, and this makes it even more appealing to big investors.
  • These funds are managed by highly skilled professionals who invest your capital after carefully analysing the market, thus improving the chances of higher returns.
  • Investors can either pay by lump sum or choose the Systematic Investment Plan (SIP), making the scheme flexible to all kinds of investors.

Who Should Opt for Tax Saving Mutual Funds?

Though there are several benefits associated with these funds, one should look for the entire picture before deciding on investment in the ELSS scheme. Since these funds are entirely dependent on the equity market, the risk is also higher; thus, if you have a high risk appetite and comfortable with the market's volatility, you can go for it. Saving tax is the scheme's main objective, but since the increased risk is also involved, you should be careful about it. If you are looking to invest for a more extended period, you can invest in ELSS because it will help you overcome the market's short-term volatility. But if you are near the age of superannuation or hesitate with ups and downs of the market; you should better go for other safe investments. There is no upper limit of investment, but one should also keep in mind that returns over rupees 100,000 after three years will be taxed with 10 per cent.

SIP or Lumpsum: Which One to Go For?

It depends from investor to investor which method they prefer. It is all about the market conditions and risk-taking ability of the investor. If investors are not ready to take high risk, they can go for the SIP method as it will allow them to adjust according to the market conditions. They can buy more when the market is low and less when it is  high. On the other hand, the lump sum is for those investors who are looking for long-term investment; in that case, minor ups and downs do not matter as they will fade out in the extended horizon.

Tax Saving Mutual Funds List

There are numerous funds available in the category of tax saving mutual funds, but here is the list of those funds that are readily preferable in the market:

Aditya Birla Sun Life Tax Relief 96 Fund

Started in the year 1995, the fund's main objective is to help an investor accumulate wealth while saving taxes over a period of time. Falls under Section 80C of IT Act, it has a minimum lock-in period of three years. The minimum amount to invest is rupees 500 and there in the multiple of five hundred. The fund invests at least 80% of its assets in equity stocks while the remaining 20% in debt and money market securities as per the market's current conditions. The returns from the last 1, 3 and 5 years are 60.22%, 7.74%, 12.77% respectively. There are no entry and exit loads. The fund is managed by Ajay Garg.

DSP Tax Saver Fund

Started in the year 2013, the fund invests 66.5 % in large-cap, 22.1% in mid-cap and 11.4% in small-cap in the equity market. The minimum investment amount is rupees five hundred. The top 5 holdings of the fund are Infosys, ICICI Bank, HDFC Bank, Bharti Airtel and Axis bank. Fund has a total of rupees 7882.75 assets under management as of Feb 2021. The benchmark followed by DSP is Nifty 500 TRI. The returns from the last 1, 3 and 5 years are 79.26%, 14.67% and 17.01%, respectively. The exit load is nil, and the expense ratio is 0.86% as of April 2021. The fund is managed by Rohit Singhania and Charanjit Singh.

HDFC Tax Saver Fund

Fund inception dates back to the year 1996 and has rupees 7580.47 assets under management as of January 2021. The fund is suitable for wealth creation in the long term. The fund invests 80-100% of the asset in the equity market and related instruments. There is no entry load and has a minimum lock-in period of three years. The total expense ratio as of January 2021 is 1.95% (regular) and 1.35% (direct). Benchmark followed is Nifty 500 TRI. The fund is managed by Amit B Ganatra and Sankalp Baid.

IDFC Tax Advantage (ELSS) Fund

It has a diverse portfolio under the equity segment. This tax saving mutual fund started in 2008 invests in sectors like banks, software, chemical, petroleum products, telecom, auto, construction projects, etc. With a fixed lock-in period of three years, it is suitable for those looking to invest for more than three years to get a better return from the market. The minimum investment amount is rupees five hundred. Returns from last one year are 99.63%, last three years 9.57% and last five years 15.38%.

Kotak Tax Saver Fund

The fund was started in the year 2005 and had a compound annual growth rate of 12.34%. The total assets under management are rupees 1679.04 crores. The fund helps an investor to generate long term capital gain from a diversified equity portfolio. The top 3 investment venues of the fund are Financial Services (25.01%), Industrial Manufacturing (12.93%), and Information Technology (10.96%). Returns form last 1, 3 and 5 years are 78.88%, 14.47% and 15.68% respectively. Fund uses the benchmark of Nifty 500 TRI and has no entry load. The fund is managed by Harsha Upadhyaya.

SBI Magnum Tax Gain Scheme

Launched in the year 1993 and has rupees 9184.73 crore as an asset under management as of February 2021. The fund's top holdings are Reliance, HDFC Bank, Cipla, ICICI Bank, State bank of India, etc. Returns from the last 1, 3 and 5 years are, 16.57%, 4.15%, 10.62% respectively. The minimum amount of investment is rupees five hundred. Fund follows the benchmark of the S&P BSE 500 Index. The fund invests a minimum of 80% of the asset in equity, bonds, fully convertible debentures, cumulative convertible preference shares, etc., and the rest can be invested in money market instruments. The fund is managed by Dinesh Balachandran.

Tata India Tax Savings Fund

This is considered as one of the most impressive funds in the market. It has given substantial returns in the last couple of years. It is an open-ended equity linked scheme. It has a fixed lock-in period of 3 years. The minimum investment amount is rupees five hundred. Investors have the option to choose daily, weekly, monthly, and quarterly SIPs. There is no entry or exit load.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Wrapping it Up!

ELSS or tax saving mutual funds provides an excellent opportunity for those investors who want to save tax and at the same time have risk-taking potential. These funds primarily invest in the equity segment, which helps investors generate higher returns over a long time. These funds have much less lock-in period (3 years) compared to others funds, making it a great place to park the capital for the short-term horizon with the sole motive of tax exemption. Even after the lock-in period expiry, if an investor wants to invest, they can do so.

The minimum amount to invest is also meagre, i.e., rupees 500, and there is no upper limit to invest. Under Section 80C of the Income Tax Act, 1961, an investor can save up to 1.5 lakhs in tax by investing in these funds. But the investor should also bear in mind that these funds fall under the category of high-risk funds because a large portion is invested in the equity market. So, if an investor has a high-risk appetite, wants to save tax, and wants high returns, tax-saving mutual funds are the go-to place.

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.

“The investment risk in investment portfolio is borne by the policyholder”

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply.

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