What are tax saving mutual funds?

Investing in tax saving mutual funds is one way to earn long-term returns and save taxes at the same time. Here are some factors you need to consider while evaluating tax-saving mutual funds.  

What are tax saving mutual funds?

Tax saving mutual funds, also known as Equity-linked Saving Schemes (ELSS), are open-ended equity funds which invest at least 80% of the total assets in equities and equity-related instruments. These funds have a lock-in period of 3 years and enable investors to claim tax deductions under section 80C of the Income Tax Act. 

Things to consider before investing in tax saving mutual funds

Before investing in tax saving mutual funds, you may want to consider the factors mentioned below: 

• Investment goals and lock-in period - When investing in ELSS funds, you must ensure that your goals align with the fund’s investment objective. You also need to consider the lock-in period of 3 (three) years. You won’t be able to withdraw funds till the lock-in period is over .  

• Performance of the fund - Evaluating the fund’s historical performance is another factor that needs consideration before investing in tax saving mutual funds. 

• Tax benefits - For investing in tax saving mutual funds, you can claim tax deductions under section 80C of the Income Tax Act. Long Term Capital Gains (LTCG) on tax-saving mutual funds up to Rs 1 lakh in a financial year are exempt. You have to pay 10% tax on the LTCG above Rs 1 lakh.

• Risks - Tax saving mutual funds invest in equities and related products. As a result, they are riskier investments than other tax-saving investments eligible for income deductions under section 80C of the Income Tax Act. As returns are market-linked, you must conduct your own research or consult a financial advisor to find the best tax-saving mutual funds when investing.

Why invest in tax saving mutual funds?

• Return on Investment (ROI) - As these mutual funds invest majorly in equity and equity-related instruments, they have the potential to yield higher returns. Tax saving benefits further expand the returns. Historical data also shows that tax saving mutual funds have offered higher returns than other tax saving financial instruments. For example - SBI Long Term Equity Fund - Regular Plan - Growth has offered 26.58%, 14.60%, and 16.77% returns over 3-years, 5-years, and 10–year periods.

• Offers flexibility - Tax-saving mutual funds offer you flexibility compared to  other investment options. You can start investing in these funds with a minimum investment of as low as Rs 500. In addition to this, you can redeem the returns anytime after the end of the lock-in period. 

• Maturity tenure - ELSS funds have the shortest lock-in period among all other investment options under section 80C of the Income Tax Act. Public provident fund and tax-saver FDs have a lock-in period of 15 and 5 years, respectively. 

How to invest in tax saving mutual funds through Wealthy?