All you need to know aboutTax Savings Mutual Funds

What are Tax Saving Mutual Funds?

When evaluating different tax savings schemes, one option that investors must evaluate is tax saving mutual funds. Simply put, investment in a tax saving mutual fund is eligible for tax benefits under section 80C of the Indian Income Tax Act. Most of the tax saving mutual funds are ELSS schemes which invest in the equity markets. Thus, in addition to your investment in such a fund being eligible to tax deduction (within the Rs. 150000 limit) it also has the potential to generate higher returns compared to other tax saving options that fall within the purview of section 80C.

How do Tax Saving Mutual Funds work?

Tax saving mutual funds usually invest in the equity markets and hold diversified portfolios that are well positioned to capture any upside in the markets and are relatively insulated from any downside. The Net Asset Value (NAV), or the intrinsic value of one unit of the fund, fluctuates with ups and downs of the underlying benchmark and overall economic factors.Investors looking to invest in tax saving mutual funds should be aware of the following characteristics of such funds.

· Lock-in period of 3 years - if the investment is made in systematic monthly instalments (SIP) then the lock-in period for each instalment is 3 years.

· While there is no upper limit with respect to the amount that can be invested in a tax saving mutual found, only an investment of upto Rs. 150000 will be eligible for deduction under section 80C.

· Since these funds invest in the equity markets, they might carry higher risk than other tax saving options.· Returns above Rs. 1,00,000 in a single year are subject to Long-term Capital Gains tax.

Benefits of Investing Tax Saving Mutual Funds

· Tax saving mutual funds come with myriad benefits. Some of the vital ones are as follows:· The investments made in these type of funds are eligible for tax benefits of up to Rs.1.5 lakh under Section 80C.· Most tax saving options come with a lock-in period of 5 to 15 years whereas tax saving mutual funds come with a lock-in

period of just 3 years.· Additionally, while the principal amount is locked-in, an investor can withdraw the dividends earned, even during the

lock-in period.· These schemes are usually open ended. Investors have the option to make lump-sum investments or invest

periodically through a Systematic Investment Plan (SIP).· The scheme portfolios are well diversified. This means that the investor can potentially reap higher returns from his

investment in the tax saving fund while at the same time the diversified nature of the fund tries to ensure that the downside risk is limited.

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Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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The tax saving option that you as an investor choose to invest in should reflect your individual risk-return requirements. However, in order to make the best choice, one needs to be aware of all the available options.