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WHAT ARE TAX SAVING MUTUAL FUNDS?


Individuals are often on the lookout for investment opportunities that can help them grow their wealth, fetch regular and high returns, and also help them save on tax. This is because the more they save on taxes, the more they can take their earnings home. This is why tax planning becomes utterly important. Section 80C offers several tax benefits to investors with its varied tax-saving investment options. Although these investments offer tax deductions, they prove slightly inefficient when you consider the average returns provided and lock-in period associated with these investments. Individuals investing in mutual funds often shy from investments due to tax on mutual funds. Enter tax saver mutual funds – ELSS, also known as Equity-linked Savings Scheme.

What are tax-saving mutual funds?

ELSS funds are referred to as tax saving mutual funds for their tax-saving attributes. ELSS mutual funds invest at least 80% of their portfolio in equity and equity-linked securities. Investments in these tax-saving investments are eligible for tax deductions of up to Rs1.5 lakh under Section 80C of the IT Act, 1961. You can save up to Rs46,800 per annum by investing in ELSS mutual funds. ELSS funds are accompanied by a 3-year lock-in period, which is also the shortest lock-in period against any other Section 80C investments. These mutual fund tax savers offer dual benefits in terms of wealth creation and tax saving.

How to invest in ELSS?

There are 3 distinct ways to invest in ELSS mutual funds:

  1. Growth option: It is a long-term wealth creation option wherein investors do not receive any type of benefits in the form of dividends. Under this option, the actual value of the fund is only realised at the redemption of the fund. This helps in appreciating the total NAV of the fund and thus, the profits tend to multiply over a period.
  2. Dividend option: Under this option, an investor receives profits in a timely manner in the form of entirely tax-free dividends. However, one must note that the dividends are announced only when the scheme enjoys extreme profits.
  3. Dividend reinvestments option: Under this option, an individual reinvests their dividends received into a new investment to add to the NAV of the fund. This option has the potential to work in your favour when the market observers an upsurge and is foreseen to continue the same way.

Although ELSS mutual have a lock-in period of just 3 years, financial advisors and experts often advise their clients to stay invested for a longer tenure, say 10 or more. They also recommend investors to link their ELSS investments with their long-term financial goals. This would help them to stay focus on their financial goals rather than fretting over the performance of the stock market frequently. That being said, investing in tax-saving mutual funds can be a great way to boost your capital in the long-term and help you to meet your financial goals and objectives. Happy investing!

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