What are Tax Saving Mutual Funds?

What Are Mutual Funds?

Mutual Funds can seem very complex, and therefore, we are here to break that myth and help you understand this simple yet powerful investment option better so you can speed up your wealth creation.

When the money invested by a lot of investors is pooled together to buy securities in the markets, it is known as Mutual Funds (Investment). Mutual Funds are managed by a Fund/Investment Manager, and the value of these Mutual Funds is reflected in the form of a Net Asset Value, also commonly referred to as NAV. The investors in the mutual fund are paid upon income/gains in the scheme proportionately with the number of units they hold. Mutual Funds offer a great way for one to invest in a diverse range of securities that are risk-managed by the fund manager and offer good returns based on the scheme chosen.

Types of Mutual Funds:

There are various types of mutual funds available to investors today depending on the purpose of the investment, types of securities invested in, the risk involved, duration, etc

1. Growth Funds
2. Income Funds
3. Liquid Funds
4. ELSS or Tax Saving Funds
5. Capital Protection Funds
6. Fixed Maturity Funds
7. Pension Funds

Let’s have a look at one of the most commonly used fund types, i.e. Equity Linked Saving Schemes(ELSS), which are more commonly referred to as Tax Saving Mutual Funds and some of their salient features.

What are Tax Saving Mutual Funds?

Tax Saving Mutual Funds are the most popular investment schemes available to the common man that is recognized and approved by the Government of India.

• Investments made in Government-approved Tax Saving Mutual Funds are exempt from the taxable income of the investor up to a limit of Rs 1.5 lakh, under section 80C of the Income Tax Act, 1961, subject to certain provisions.

Equity Linked Saving Schemes(ELSS) are diversified equity mutual funds that allow investors to get tax deductions under 80C and thus making sure they create wealth for themselves. ELSS invests in a diverse range of equity options across large, mid, and small-cap options.

With a lock-in period of 3 years, ELSS investments are subject to 10.4% tax on the gains upon exiting the investment after 1 year. Investments in ELSS can be made using either Lump Sum amounts or Systematic Investment Plan.

Most fund managers recommend ELSS as a long-term wealth creation opportunity, so if you are looking for an investment option that ticks both boxes of tax savings and long-term wealth creation then ELSS is the best out there.

Benefits of Investing in Tax Saving Mutual Funds(ELSS):

1. 2X Higher Returns Than FD or PPF

ELSS or Tax Saving Mutual Funds offer a fantastic option when considering long-term wealth-creation opportunities. ELSS has continued to deliver consistent results in terms of performance with an average of 15% returns in the past 3 years, whereas PPF & Fixed Deposits offer returns of 6-8% each

That’s almost 2X returns as compared to other tax-saving instruments such as PPF & Fixed Deposits

2. Lowest Lock-In Period

Compared to other tax-saving options, ELSS offers the lowest lock-in period of 36 months or 3 years whereas the Public Provident Fund (PPF) has a lock-in period of 15 Years & a National Savings Certificate of 5 Years.

3. Option to Invest Monthly

Tax Saving Mutual Funds is as popular among the common man not just because of the ease of investment, the good returns but ELSS also offers the options to make investments monthly using the SIP model with initial investments starting at INR 1000 or make lump sum investments with no upper limit.

4. Best Tax Saving Investment under 80(C)

While enabling tax-saving under 80(C) for investors, the model turns out to be the best tax-saving instrument following the EEE format i.e. Tax Exemption, Wealth Accumulation & Zero Exit Load. The great returns over a longer duration make it every investor’s best bet to maximize gains over time.

Bottom Line

Invest in ELSS not because they have a short lock-in period or they offer great tax savings, invest in ELSS because they have the highest potential of wealth creation when looked at as a long-term opportunity of 15-20 years. With minimized risks owing to professional fund management, tax savings, and immense wealth creation opportunities, ELSS offers a solid bet for investors with a financial goal.