Finance

Tax Saving Mutual Funds- Should You be Investing in them?

Brian Harris 3 years ago 3 min read

When it comes to investment, there are plenty of avenues out there that can be utilized to help grow your funds. Out of all these, mutual fund investment has become more and more popular among the masses. However, the usual mutual funds have one disadvantage. There are no tax benefits or deductions applicable on mutual fund investments. Investment options like PPF and Tax Saving FDs have tax benefits under Section 80C of the Income Tax Act, which regular mutual funds do not have.

But there is one specific type of mutual fund scheme, called Tax Saving Mutual Funds or Equity Linked Savings Scheme(ELSS) that allows for tax deductions of upto Rs. 1.5 lakh under Section 80C. Let us look in detail at ELSS funds and understand whether you should be investing in them.

What is an ELSS Mutual Fund?

An equity-linked savings scheme is a type of mutual fund scheme with asset allocation of at least 65% in equity and the rest can be in fixed income securities. Additionally, an ELSS scheme has a lock-in period of 3 years. These investments cannot be redeemed under any circumstances before the lock-in period. The ELSS Mutual Fund scheme is the only mutual fund that offers tax benefits under Section 80C.

Features of Tax Saving Mutual Funds

– An only mutual fund to offer tax deduction of up to Rs. 1.5 lakh under Section 80C. This means your taxable income will effectively reduce and you’ll pay tax according to your income tax slab.

– There Is a lock-in period of just 3 years for ELSS funds, with no provisions for premature withdrawal. This lock-in period is the least among all other investment options under section 80C.

– There is no upper cap for investing in ELSS funds. You can invest any amount. The minimum amount depends on the fund house.

– ELSS may be the only tax saving investment option that offers inflation-beating returns.

– Usually one goes towards tax-saving options like insurance etc. But ELSS gives you the twin benefits of tax saving as well as wealth creation.

Should You Invest in Tax Saving Mutual Funds?

There are many factors that you must take into account before investing in ELSS. Tax saving should not be the sole reason for investing in these mutual funds. You must also look into the return potential, as well your own risk appetite when investing. Since ELSS funds have a minimum 65% asset allocation in equity, they have a certain element of risk attached to them. The returns are never guaranteed and a good run in a financial year does not mean the returns will be similar the next year. So who should invest in them?

If as an investor, you have a certain risk-taking ability, you may invest in ELSS funds since these funds show greater return potential than other tax saving investment options like PPF and Tax Saving Fixed Deposits.

However, if you’re a risk-averse investor and would rather invest in something that gives guaranteed returns, then ELSE might not be such a good option for you. You’d be better off with options line PPF or Tax Saving FDs.

To Conclude

Thus, ELSS or Tax-Saving Mutual Funds are an excellent way to save up on valuable tax. With tax deductions of up to Rs. 1.5 lakh from your taxable income, you stand to save as much as Rs. 48,600 in taxes in a given year due to ELSS funds.