Tax Saving Mutual Funds

An insight on should you invest in Tax Savings MFs to Save Your Taxes

All you need to know what is tax saving mutual fund and why it is better than other investments you make?

In the recent few years, mutual funds have become very popular with the investors in India. Especially the young investors are mostly moving towards mutual fund investments for the wide ranging options it offers to its wide ranging investors from all strata of people. Moreover, mutual funds offer the opportunity to be managed by qualified and expert finance professionals as funds managers. And the best reason for the increasing number of investors in mutual funds is its high return on investments, as compared to traditional mode of investments that offer fixed rate of interest at the end of the terms. In mutual funds, money is collected from multiple investors by the fund managers or investment companies, who invest the accumulated money in a balanced way in plans like debt market, bonds, equities, stocks and securities.

Mutual funds collect money from multiple investors to invest in debt market and in equities. The investment is done in a balanced way so that it does not hurt you financially. Investors also get investment choices in mutual funds that give options to choose from open or closed ended plans. The options also include speciality funds or even combination of all or some. One can also choose the investment options in mutual funds that can give them best chance to achieve one’s life’s goals. Investors who are prepared to take risk with their own investments can make these choices. In mutuals funds it is like more the risk more is the return, like if you have take high risk you get high returns, if you take medium risk you get medium returns and if you take low risk then you get low returns . The benefit with the low investment is it is the safest investment option in mutual funds as it provides better protection to the principal amount invested.

Who does not love good return on investments made but do they give tax relief on the investments made in mutual funds? Many people make investment keeping only the tax saving part in mind. Does mutual fund investment make any difference in the tax savings? Yes, mutual funds investment does give tax benefits if the investment is done under tax savings mutual funds. You get tax benefits under 80C of the IT Act.

Know About the Tax Saving Mutual Funds

There is not much difference in tax savings mutual funds except the added bonus that investments made in mutual funds are entitled for tax reliefs under section 80C. Otherwise, it is similar to other mutual funds. The mutual funds that are for tax savings mostly are ELSS schemes and the funds collected for them are invested in equity market.

Tax Saving Mutual Funds Working Pattern

The pattern of investment in tax savings mutual funds is whenever an investor puts his/her money in mutual funds their money is added to a pool from where it is invested in various sectors. The way funds are invested in equity market that even if one investment invites losses, others investments made in other sectors can recover the loss. The very reason tax savings mutual funds generally do not push you towards major crisis as every time some or the other sector fairs well in the equity market. You can see how the breakup of investments made in various sectors look like:

  • Automotive industry 6.56%
  • Banks 17.56%
  • Consumer durables 5.34%
  • Consumer non-durables 5.66%
  • Power 5.92%
  • Software 8.93%
  • Pharmaceuticals 9.99%

The above breakup shows 17.56% of the total investment is invested in banks, 6.56% in automobile industry and 5.92% in power sector and so on.

How ELSS Schemes Behave?

People who have been investing in ELSS schemes know they are likely to come with a 3 years lock-in period. This means the investments made cannot be touched for withdrawal before the completion of the time for every single investments made in the scheme. That is if you have made your investment in monthly systematic investment plan (SIP) then every investment made every month will be locked for 3 years. To understand it better follow this example – If the first investment is done on 1st February, 2018 and second investment is done on 1 March, 2018 then the first investment will be unlocked on 1st February, 2021 and second will be unlocked on 1 March, 2021.

As the lock-in period comes to an end then you as investor can find out the number of units that have got unlocked and can redeem them at the current Net Asset Value (NAV). You get whatever amount is mentioned for each unit. If you want to make withdrawals, you should first try to find out the number of units available for you and then submit your claim for those units by providing the claim form to mutual funds provider or your funds manager. As soon as the claim made by you is processed, the amount will be credited to your bank account directly.

ELSS Types

If you have been investing in mutual funds then you already know mutual funds have two types of scheme running under it that is growth scheme and dividend scheme. The difference between growth and dividend fund is, if there is an announcement of dividens by the funds then you as an investor would get an extra profit based on the dividends. The extra incomes you make through these dividend are not taxable and can also be reinvested in the fund, which can be further made eligible for tax benefits. This provision is not available with growth schemes of mutual funds.

Tax Saving Mutual Funds and their Features

  • ELSS allows you to invest as low as Rs. 500 in its schemes if you can’t afford large amount of money in your ELSS investment. There is no upper limit of investment as your can find in PPF and NSC.
  • Though there is no upper age limit but when it comes to making tax saving investment value of Rs. 150000 only can be made eligible for the tax benefits.
  • Tax saving mutual funds investment have 3 years lock-in period. Each investment made in the scheme is lock-in separately.
  • As we are told and we come to know from several sources, the investments done on mutual funds come with inherent marker risk factors. The risk factors are – high, medium and low, based on the schemes and sectors the funds are invested in.
  • ELSS (Equity Linked Savings Schemes) a typically tax saving mutual funds, which are open ended.
  • The ELSS mutual funds also has nomination feature, in which you can nominate a nominee
  • There are entry and exit loads in several ELSS schemes of mutual funds. These loads are the fees that is paid o the mutual fund companies or managers.

Tax Saving Mutual Funds Benefits

As an investor you can gain a huge amount of profit through tax savings mutual funds. Following are some of the benefits you get:

  • The most visible and known benefits of tax savings benefits is you are eligible to invest up to Rs. 1.5 lakhs for tax benefits.
  • Also, you are not charged tax for your long term capital gain benefits.
  • When you invest in long term capital gain scheme, you know you need them for long term goals like – buying cars, buying house or making down payment for your new house or your child’s education. You can also use it for your dream vacation.
  • Tax savings mutual funds allow you to invest on a monthly basis through Systematic Investment Plan (SIP). So you are not forced to invest at one go and do not have to panic for large investments you have to make as you will invest in very small amounts, month wise.
  • In tax savings mutual funds the funds are not invested at one place. The reason for keeping the portfolio in diverse sectors is minimising the risks of big losses.
  • If you keep your savings intact and do not withdraw till the end of the completion of the full term then the entire income that you make at the end will help you achieve some big goas.
  • Even during the lock-in period if you are not allowed to withdraw the principal amount, you can still withdraw the dividends that you earn in that period.
  • These mutuals funds has lock-in period of just 3 years, while other investments offer 6 to 15 years of lock-in periods. This means the investments that offer 6 to 15 years lock-in period do not allow you to withdraw your income before 6 to 15 years, based on what you have invested on.
  • You can make investments in these schemes all year round as they are open ended schemes.
  • There is no fixed amount that you have to invest on. You can make your decision based on the availability of the funds with you. Also you have full control on the amount your wish to invest, depending on the capital you have to invest and the risk taking capacity you have.
  • All the funds that investors invest in mutual funds are managed by qualified fund mangers. This is a plus point of mutual funds that you as an investor need not be bothering about the know how of your funds and investments. There are highly qualified professionals to take care of your funds and take decisions in favour.

Tax saving mutual funds ELSS Vs PPF, NSC and FD

Mutual Funds

Public Provident Fund

National Savings Certificates

Fixed Deposits

Minimum investment

Rs.500.00

Rs.500.00

Rs.100.00

Rs.100.00

Maximum investment

Unlimited

Rs. 1.5 lakhs per year

Unlimited

Determined by bank

Returns

Not guaranteed

Guaranteed

Guaranteed

Guaranteed

ROI

Determined by the market situation

8.70% per annum (approximate)

8.50% per annum (approximate)

Up to 9% per annum

Income tax benefit

Yes

Yes

Yes

Yes

Tax on returns

None for long term capital gains

None

Yes

Yes

Safety

Risky

Safe

Safe

Safe

Lock in period

3 years

15 years

6 years

None

Premature withdrawal

Not allowed

Partial withdrawal after 6 years

Not allowed

Allowed with penalty

The investments like NSC, FD and PPF offers risk free or safe investments but the returns investors earn from these investments are fixed hence limited to the fixed interest rates that investors earn in one year. Besides, they also have longer lock-in periods. Contrary to the above three tax saving options, mutuals funds are associated with market risks and hence could not be a safe investment for investors, but the lock-in period in mutual funds is much shorter and you also get far better returns based on the market performance. If markets perform well then the economy grows and the returns of the investors to gets better.

Some of the Top Tax Saving Mutual Funds in India

The list of mutual funds that you can choose from is very long but there are some which are believed to be the best performers in the market. Here is the list of tax savings mutual funds you can bet on right now:

  • IDBI Equity Advantage Direct-G
  • Axis Long Term Equity Direct-G
  • Birla SL Tax Relief 96 Direct-G
  • Birla SL Tax Plan Direct-G
  • Birla SL Tax Relief 96-G
  • Franklin India Taxshield Direct-G
  • Kotak Tax Saver Direct-G
  • Axis Long Term Equity-G
  • Birla SL Tax Plan-G

Please Note: The list shared above can change anytime subject to their performance in the current market. So it is always advisable you take advice from a qualified funds manager or some mutual funds agency or advisor who can help you understand the basics of investments. The above list can change from time to time.