Exploring Good Mutual Fund Schemes to Save Tax

29 August 2022
5 mins read
Exploring Good Mutual Fund Schemes to Save Tax

Which mutual funds help you save tax?

An equity-linked savings scheme allows a Hindu Undivided Family or individual a deduction from the total income of up to ₹1.5 lakhs under Section 80C of the Income Tax Act. Thus, if an investor were to put in ₹50,000 into an ELSS scheme, this amount would be deducted from one’s gross taxable income, thereby reducing her tax burden. These schemes have a lock-in period of three years from the date of unit allotment.

After the ELSS lock-in period is over, the units are free to be switched or redeemed. ELSS both offer dividend and growth options. Investors can also invest through a systematic investment plan (SIP) where investments made upto ₹1.5 lakhs in any financial year are eligible for tax deductions. A mutual fund in a tax-saving instrument like an ELSS scheme can save ₹46,800 in taxes through a tax-saving fund. With average returns at around 15% in the last three years and a 3-year lock-in period, these funds give you attractive interest over the years.

Benefits of Investing in Good Tax Advantage Mutual Funds

ELSS schemes — currently the top tax-saving mutual funds to invest in — are diversified equity mutual funds. They invest your money into equity shares of companies across a variety of market capitalizations. These include large-cap, mid-cap, and small-cap companies. This kind of diversification allows you to wade through turbulent markets while keeping your returns in line with your financial expectations. Some of the benefits of tax saving mutual funds are as follows:

  1. Lowest lock-in period

When it is put against other tax-saving options, equity-linked savings schemes come with the lowest lock-in period of just three years. Being equity funds, it is also advisable that one remain invested in such funds for the long term.

  1. Among the best tax advantage mutual fund options under 80C

ELSS schemes also help one avail tax deductions under Section 80C as per the IEEE format, that is  tax exemptions, zero exit load, and wealth accumulation.

  1. Option for monthly investments

With ELSS schemes, you can start off investing through SIPs at amounts as low as ₹1000. On top of this, there is no upper limit to the amount that you can invest.

  1. 2x Higher potential yield than FD / PPF

In comparison to conventional fixed deposits, an equity-linked savings scheme offers potentially higher returns that can beat inflation in a very efficient manner.

How to find a Good Mutual Fund Schemes To Save Tax?

The following factors are especially helpful when it comes to finding a mutual fund scheme that can aid in saving one’s tax.

  1. Performance of Fund against Benchmark

A mutual fund scheme’s benchmark index is the standard against which its stock allocation and performance are compared. The benchmark index guides the investment philosophy of the scheme. For this reason, the asset allocation of a benchmark index must align with the investment objective it serves. The benchmark index guides the investment philosophy of the scheme. As an example, the benchmark index for a large-cap mutual fund should be an index of large-cap stocks. Additionally, the benchmark of a mutual fund that focused on banking stocks should be a banking index.

The Securities and Exchange Board of India has also mandated that mutual funds utilize the TRI or the ‘Total Returns Index’ variant of indices as their benchmarks. TRIs are created on the assumption that dividends are reinvested in mutual funds as and when they are declared. To put it simply, TRIs account for the fact that companies declare their pay-out dividends. TRIs are therefore a better benchmark than ordinary Price Indices.

  1. Categorical Performance

A second crucial factor, equally important in assessing a mutual fund scheme, is its overall performance when compared to its active peer group. Categorical performance aids in getting a holistic and complete assessment of the mutual fund. A comparison should be undertaken only among similar types of mutual fund schemes. As an example, a large-cap equity mutual fund can solely be compared with another large-cap tax saving mutual fund, and not against debt funds or mid-cap tax saver funds.

  1. Consistency in Performance

What do the top ten ELSS funds all have in common? They are all able to generate good returns for their investors consistently over a period of time, rather than simply generating whirlwind returns. In fact, the fund should be capable of providing consistent returns in both bearish and bullish periods of the stock market.

  1. Experience of the Fund Manager

When selecting a mutual fund, another crucial factor to be considered is the performance of the mutual fund and of the fund manager, especially how long she or he has been at its helm. For this, an investor must look at the experience of the fund manager with the fund in question, and with other funds that are currently managed or have been managed in the past by her or him.

  1. Asset Management Company Track Record

An AMC or ‘Asset Management Company’ is also known as a fund house. It is the company that manages the mutual fund scheme. For instance, HDFC Mutual Fund is the name of the AMC that manages mutual fund schemes such as HDFC Top 100, HDFC Equity, or HDFC small-cap fund. Many of the decisions are made by the Chief Investment Officer of the AMC. A stock that is poorly selected is often present in several schemes that are owned by an asset management company since this selection has been made at the AMC level. This is why it is so important to check the track record of the asset management company, especially while selecting a tax-saving mutual fund to invest in.

The Bottom Line

If you’re looking for the top ten ELSS funds to invest in to reduce your tax burden this year, ensure you are carrying out thorough research. This involves looking at the track record of the asset management company, the fund manager, the overall performance both categorically and against the benchmark index.