Your Guide to Tax Saving Mutual Funds

A lot of investors in the market swear by the convenience of investing in mutual funds. In a way, mutual funds ensure that your hard earned money is in the hands of well-trained individuals who manage it with experience. They offer more returns than fixed deposits and lesser risks than the stock market. Now, the taxes that are levied on these mutual funds can be saved by investing in tax saving funds. These funds are categorised under section 80 C mentioned in the Income Tax Act and are an excellent way to further save the money that you earn.

What are Tax Saving Mutual Funds?

Tax Saving Mutual funds are a type of Mutual Fund that comes with additional benefits of tax exemption. They are highly beneficial and due to the long lock in period offer better returns than the usual mutual funds.

How do Tax Saving Mutual Funds work?

There are a lot of investors who invest in a particular fund. The idea behind a mutual fund is that one does not incur losses very often. It happens due to the balancing of losses and gains. When a lot of investors invest in a particular fund, the money is further distributed into shares of various sectors. It very rarely happens that all the sectors face losses at the same time. This results in maintaining a balance wherein if there is a loss even in one sector, there is a gain in another.

Types of ELSS

There are two types of schemes that you can opt for under the tax saving umbrella. There are dividend schemes available as well as growth benefits that you can choose to invest in. In dividend scheme, there is no lock in period, and an investor gets an additional amount every time he spends some money. In the case of growth scheme, no such benefits are available, but the returns are quite lucrative. Also, in a dividend scheme, the money can be re invested.

What are the main features of Tax Saving Mutual Funds?

Unlike a PPF (Public Provident Fund) or an NSC (National Savings Certificates), you do not need to put large sums in ELSS (Equity Linked Savings Scheme). If you cannot afford to put aside a large sum of money, then even a nominal amount of Rs 500. Although there is no upper limit as such, the tax benefits are only available to those who invest a sum of minimum Rs 1 lakh.

Unlike other mutual funds, a tax saving fund comes with a lock in period of 3 years. This gives the fund manager a chance of strategizing better and ensuring more returns on your investment. Like any other mutual fund, these funds also come with 3 risk levels, i.e., low, high and medium. They are open ended in nature.