Mutual funds also give you the opportunity to save tax. It is one of the most popular tax saving option. There is a separate category of tax saving mutual funds. These tax saving mutual funds are called Equity Linked Saving Schemes (ELSS).
Besides, mutual funds you can save tax by investing in PPF account. Tax saving FD and national saving certificate also gives you the chance to reduce your tax burden. Term insurance and other types of insurance policies are also the popular tax saving options.
Tax Saving Mutual Funds Benefits
Among many tax saving options Mutual funds scores on some aspects.
- It has the potential to give the greater return than any other tax saving investment. The tax saving mutual funds primarily invest in share market. As you know solid shares can increase your wealth quickly. However, like shares, tax saving mutual funds also carry the risk of losing capital.
- It has shortest lock-in period of 3 years. All the tax saving investments has some kind of the lock-in period. You can’t redeem your investment from national saving certificate or tax saving FD before 5 years. To avail the tax benefit, you must remain invested in insurance schemes at least for 5 years. PPF account also matures in 15 years, However, you can take a loan from PPF account after 7th year.
- You can invest through the systematic investment plan. Systematic investment plan is not available to tax saving FD or NSC.
- Mutual fund charges a less amount of agent commission and management expense. Insurance schemes charge high amount for distributor commission.
- It is very transparent. You can know the value of your investment on the daily basis.
- You can start investing from as little as Rs 500.
Also Read : ELSS Tax Benefit and Comparison With Tax Saving investments
When Tax Saving Mutual Fund Is Not So Good Option
On some aspects, tax saving mutual funds lag behind. You must know the negatives of tax saving mutual funds as well.
- Mutual fund is the riskiest tax saving investment. It invests in shares. Shares can swing wildly.
- Performance of tax saving mutual funds depend upon the fund manager. The performance can go down with the change of fund manager.
- Timing is very important in tax saving mutual funds. Buying a mutual fund and at the market peak can hamper your return expectation.
- Lock-in is the lowest, But you can be trapped in a mutual fund for a long tenure. As the market may go in the recession at the time of your 3-year completion.
Are You Eligible For Tax Saving Mutual Funds
Tax saving mutual fund is like any other equity mutual fund. You should invest in a tax saving mutual fund only if you wish to invest in the share market.
You can’t put your total investment in the share market. Investment in shares should be in a balanced proportion. A tax saving mutual fund is like investing in the shares. You should take a balanced approach for a mutual fund investment as well.
Investment in a mutual fund should be directly proportional to your risk taking capabilities. If you can’t bear heavy loss or you can’t wait for years, you should stay away from the tax saving equity mutual funds.
Do you have time to monitor the mutual fund performance? If yes, you should invest in equity linked saving schemes.
Investment in tax saving equity mutual fund should be your well-thought decision. It should not be because an agent or bank executive is persuading you.
How Should You Invest In Tax Saving Mutual Funds
Investing In tax saving mutual funds is like investing in any other mutual fund. You can invest through these means.
- Mutual Fund Distributers– You can get the contact number of your nearest mutual fund distributor through the AMFI website.
- Stock broking companies – Generally all big companies also sell mutual fund schemes. You can contact nearest stock broker.
- Online trading portals such as ICICIDirect, HDFC securities, Kotak securities and sharekhan.
- Banks – banks also sell mutual fund schemes.
- Independent Fund Portals – The independent fund portals sell mutual fund schemes. e. g. Fundsindia.com
- Fund houses – Every fund house sell its mutual fund schemes through its branches or contact points. You can get the address from the web sites of fund houses.
How To Choose Best Mutual Funds
You should do some exercise before investing in tax saving mutual fund scheme. there are more than 50 equity linked saving schemes in the market. You should choose the best mutual fund scheme.
Choosing best mutual fund scheme for tax saving is not mere picking the top rankers. You have to take many precautions as well. You should see whether your mutual fund has the qualities of best ELSS.
The Right Way of ELSS Investment
As I have told, there are many ways of mutual fund investment. But among these Every way does not give you the same return. To get the maximum return from your ELSS investment, you should opt for ‘direct’ mode. You should invest directly to the mutual fund company. Direct mutual fund schemes give you the better return. As these schemes don’t pay commission to the distributor or intermediary. For direct investment in a tax saving mutual funds scheme, you can either visit to fund house touch point or you can invest online in direct mutual funds.
LumpSum or SIP?
Should you invest in tax saving mutual funds at once or a small amount after fixed intervals? For a tax saving mutual fund, you should go for the SIP.
Regular fixed investment is called systematic investment plan. In the systematic investment plan, you put your money regularly. Becuase of this discipline, you can easily invest desired amount in the tax saving mutual fund.
Since you put money regularly, you buy mutual units at various price points. Therefore, the you get mutual fund units at an average price. Because of the average price there is less chance of getting mutual fund units at the peak.
Tax saving mutual fund is the best option for the young. A young person can take greater risk for better returns. SIP is the best method of investing in tax saving mutual funds. People with lots of liabilities should not opt tax saving mutual fund as it can put them in a fix.