Myths and Facts About Tax Saving Mutual Funds

 

The term tax-saving mutual funds may at first seem like an irony to you. This is because mutual funds typically tend to be investment and growth-focused whereas traditional tax-saving instruments are focused on well, savings.

However, this is no longer true.

Owing to the growing preference among salaried professionals and business persons for mutual funds, as well as tax-saving products that offer better returns and lesser lock-in, tax-saving mutual funds are now a reality. Commonly known as equity-linked saving scheme or ELSS, such tax-saving mutual funds help you deliver on your tax-saving goals without requiring you to make long-term commitments.

However, before you can go ahead and invest in such a tax-saving mutual fund, you need to be clear about the various myths and facts associated with tax-saving mutual funds.

Myths	Facts
Tax-saving mutual funds require you to invest a specific amount	You can start with as little as Rs.500 a month if you wish to invest in any good ELSS or any top tax saving mutual fund
You can save very little tax when you invest in an ELSS	Assuming your income falls under the 30% tax slab, and if opt for the maximum investment allowed under Section 80C, which is Rs.1.5 lakh, you can save as much as Rs.46,800 in just one financial year
It is very complicated to identify a well-performing tax-saving mutual fund	It is fairly easy; there are a host of online resources where you can compare yearly and longer tenure trends

 

Watch: #SavingsKaDoubleRole - Save Tax and Build Wealth with Mutual Funds Tax Saving Schemes

Now that you have a fair understanding of the various facts that make tax-saving mutual funds or ELSS mutual funds a viable instrument, there are some more things you need to keep in mind to get best value for your investment efforts.

Common Mistakes	Expert Approach
Investing all your tax saving amount in a single top tax-saving mutual fund	Diversifying your investment amount into multiple top tax-saving mutual funds
Withdrawing your investment after the mandatory three-year lock-in	Staying invested in the tax-saving mutual fund or ELSS even after the mandatory lock-in is over for continued taxation benefits on returns
Investing a lumpsum amount at the end of the year when tax-related investment becomes crucial	Investing through the year to benefit from the law of averages while gaining tax saving benefits

 

You are almost ready to invest in top performing tax saver mutual funds for tax planning. However, before you can get started, here are some final things to keep in mind.

Frequently overlooked things	Best practices
Having a tax-saving strategy, just as you have an investment strategy	Basis your taxable income or your tax slab, and the various tax benefits available under different sections, consider how much income should you keep aside every month for gaining adequate tax benefits
Considering all tax-saver mutual funds or ELSS funds to deliver similar benefits or returns	Compare top tax saving mutual funds in terms of historic returns and look out for add-on benefits, if any
Assuming all tax-saving mutual funds expose your investments to 100% equity	Understanding that tax-saving mutual funds or ELSS funds vary in their equity exposure, ranging from 80% to 100%

Basis all the above factors, you should invest your hard-earned money to gain tax-benefits not just for the current financial year, but for years to come.

 

Also Read: Tax planning with mutual funds