Tax Saving Mutual Funds

There are many forms of investment in today’s market and if you are looking forward to investing in mutual funds then you should consider tax-saving mutual funds due to the tax benefits they offer.

What are Tax Saving Mutual Funds?

Tax saving mutual fund is a savings scheme similar to any other mutual fund but it also provides you tax benefits by saving taxes under section 80C of the Income Tax Act, 1961. A tax-saving mutual fund like ELSS(Equity Linked Savings Scheme) can offer tax deductions of up to Rs.1.5 lacs. 

• How does Tax Saving Mutual Fund Work? : A tax-saving mutual fund takes money from the investors and that money is invested into the equity market. The lock-in period for tax-saving mutual funds like ELSS has a lock-in period of three years. In the case of SIP investment, The lock-in period for each installment is also three years. 

• History of the Funds House: A Fund House, also known as Asset Management Company is an organization that invests the money taken from investors into equities, mutual funds, etc. This industry started in India in 1963 with the formation of the Unit Trust of India(UTI). It went on changes which can be divided into four phases however the entry of public sector funds started in the second phase in 1987, The entry of private sector funds started in 1993 in the third phase. The fourth phase which started in 2003 divided UTI into two parts, UTI and UTI Mutual Fund. The UTI Mutual Fund functions under mutual fund regulations.

• Returns: While investing in tax-saving mutual funds, You can expect growth of 10-12% annually, and the tax deduction it offers also makes it quite profitable. It saves tax under Section 80C of the ITA, 1961.

• Expense Ratio: The expense ratio is a very important thing to check while investing in mutual funds. Tax Saving mutual funds have a quite low expense ratio. The lower expense ratio provides higher profits.

• Portfolio Turnover: A portfolio turnover shows how quickly the securities are purchased or sold by the managers of the funds. In the case of tax-saving mutual funds like ELSS, they have a very wide portfolio of buying and selling different equities which guarantees a good portfolio turnover. 

• Types of Equity-Linked Savings Scheme: There are three types of ELSS mutual funds, Investors can choose the best one with respect to their needs.

1. 1. Growth Option: Under this option, The investor only gets returns during the time of retrieval. You can not get benefits in the form of dividends if you choose this option.
   2. Dividend Option: Under this option, The investor gets returns in the form of timely dividends. You only get dividends when there are sufficient profits. Investors also have to pay the tax on the dividends with respect to their income tax slab.
   3. Dividend Reinvestment Option: Under this option, Investors can reinvest the dividends under the same scheme. This decision solely depends on the condition of the market.

Features of Tax Saving Mutual Funds :

• This savings scheme has a tenure of three years and the lock-in period is also three years. 
• The scheme totally depends on the market conditions so there is not much-assured return and risks are quite high but if you invest smartly then you can avoid risks.
• This scheme offers tax deductions as per Section 80C of the ITA which is quite a profitable feature.

Benefits of Tax Saving Mutual Funds :

1. It has better returns due to the tax savings it offers when compared with schemes without tax benefits.
2. ELSS has the shortest lock-in period of only three years.
3. This scheme is market linked so you can also expect higher returns.

If you are looking forward to investing in mutual funds then ELSS is a great savings scheme but you need to do a proper analysis of the market before making such investments. If you carefully follow the steps then you can expect great returns also with tax deductions.