WHAT ARE TAX SAVING MUTUAL FUNDS?

WHAT ARE TAX SAVING MUTUAL FUNDS?

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If you earning, chances are you are looking out for ways to save on taxes. The more you save on taxes, the more you can take your earnings home. Section 80C of the Income Tax Act, 1961 offers tax benefits to investors with its varied options of tax-saving investments. Although these investments provide tax deductions to its investors, they prove slightly inefficient when you consider theaverage returns provided in the context of the period your money is locked-in with them.One such investment avenue is tax-saver mutual fund – Equity Linked-Savings Scheme or also known as ELSS.

What are tax-saving mutual funds or ELSS mutual funds?

ELSS funds are like any other mutual funds that pool money collected from various investors and further invest it in various stocks of several companies. This creates a basket of equities for the investors, minimizing the risk exposure experienced due to the market volatility. ELSS funds invest at least 80% of their corpus in equity and equity-linked securities. Investments in these tax-saving mutual funds are eligible for tax deductions of up to Rs1.5 Lakhs u/s 80C. As an investor, you can save up to Rs46,800 per year by investing in ELSS funds. The amount you invest in ELSS is subtracted from your taxable income which further lowers the amount of income tax paid by you. ELSS mutual funds are accompanied by a 3-year lock-in tenure, shortest lock-in period among all other Section 80C investments which experience a minimum of 5-year lock-in tenure. Thus, ELSS funds act as a mutual fund tax saver scheme that also aids in wealth creation.

Distinct ways to invest in ELSS

There are 3 ways to invest in these tax-saving mutual funds:

  1. Growth option: This is a long-term wealth creation platform wherein the investor does not receive any benefits in the form of dividends. In this option, the true value of the fund is only realized at redemption. This aids in appreciating the total Net Asset Value (NAV) of the fund and thus the profits multiply over time.
  2. Dividend option: Under this option, an individual receives benefits in a timely manner in the form of completely tax-free dividends. The dividends are announced only when the fund enjoys excessive profits.
  3. Dividend reinvestments option: Under this option, the investor reinvests his dividends received as a new investment to add to the NAV of the fund. This option can work in your favor when the market witnesses an upsurge and is predicted to continue the same way.

Although ELSS funds are mandated to be invested for a period of 3 years, mutual fund experts often advise their clients to stay invested for a longer duration, say 10 to 15 years. They ask their clients to link their ELSS investments with long-term financial goals. This would help to focus on their financial goals rather than fretting over the performance of the stock market. That being said, tax-saving mutual funds can be a great way to boost your wealth in the long-term and help you to meet your financial goals.

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