Tax Saving Mutual Funds: Best Options to Save Tax and Earn High Returns

Tax saving mutual funds, popularly known as Equity Linked Savings Schemes (ELSS), have emerged as one of the best options Indians can choose to minimise their income on taxable accounts and increase their savings kitty. These funds are a smart investment option because they help you save tax and provide the potential for higher returns through investments in the equity market. This guide will explore tax saving mutual funds, their benefits, best tax saving mutual funds, and how to use them for your advantage.

What Are Tax Saving Mutual Funds?

Tax saving mutual funds are a type of equity mutual fund with the added benefit of tax savings under Section 80C of the Income Tax Act. Thus, you will always be able to claim up to ₹1.5 lakhs in deductions from your taxable income. With this inference, mutual funds for tax savings can be chosen by those who want to save tax and simultaneously work towards the creation of wealth through investment in the stock markets.

Important Features of Tax Saving Mutual Funds

The important features of tax saving mutual funds are:

1. Income Tax Deduction: The best perk about saving through tax saving mutual funds is that they save you a great amount under section 80C, considering an investor may save up to ₹46,800 in taxes based on the tax applicable.
2. Lock-In Period: Funds have a mandatory lock-in period of three years. That means you can only withdraw the money after three years. However, the lock-in period is much shorter than that of other tax-saving options such as PPF-15 years or NSC-5 years.
3. Equity-based: ELSS tax saving mutual funds are equity-oriented. They invest majorly in equities and, therefore, have the possibility to generate more returns than traditional investments in fixed income. The returns may also be volatile since it is a stock market.
4. Diversified Portfolio: The fund’s investment will diversify across companies and sectors, allowing a balanced proportion of stocks, with which investors can reduce risks regarding the individual stocks.
5. Professional Management: Tax-saving mutual funds are guided by professional fund managers who base their investment decisions on the analysis and research done in the market.

Benefits of Investing in Tax Saving Mutual Funds

The benefits of tax saving mutual funds are:

1. Tax Benefits: The primary reason the investor considers investing in these funds is to save on tax. Income tax up to ₹1.5 lakhs can be saved because it falls under the deduction provisions of Section 80C while investing in tax saving mutual funds.
2. High Return Potential: Since the funds invest in equities, they may have the potential to offer much higher returns than other tax-saving options. Historically, the returns from ELSS tax saving mutual funds have ranged between 12-15% per annum in the long term.
3. Shorter Lock-In Period: ELSS funds have the shortest lock-in period compared to any other tax-saving option. Just as PPF has a lock-in period spanning up to 15 years, tax-saving mutual funds lock in your money for just three years.
4. Wealth Creation: While other tax-saving instruments are more capital protection-oriented, tax-saving mutual funds are designed to generate wealth by putting the surplus in the stock market.

How to Save Tax on Mutual Funds?

If you are looking to save tax using mutual funds, let’s move on to how you can do it and what investment you should make to make the most of your money:

1. Maximise Your Investment: Invest as much as possible up to ₹1.5 Lakhs in Tax Saving Mutual Funds to get the complete relief granted under section 80C, in terms of tax deduction.
2. Invest in SIPs: Any form of systematic savings through investing in SIPs can reduce your taxable income and minimise the market fluctuation wherein you will be investing periodically.
3. Long-term investment is what ELSS wants you to do: Even though the lock-in period of ELSS is for three years, an investment over a long term could ensure that you earn the maximum with minimum tax paid for the long-term capital gains.
4. Choose Best Tax Saving Mutual Funds: Monitor the performance of the tax saving mutual funds in which you are investing very closely. Choosing the top tax saving mutual funds for investment-considering relative past performances and the experience of fund managers-makes a huge difference for you in return amounts.

Top 10 Tax Saving Mutual Funds for 2024

If you are looking for the top 10 tax saving mutual funds for 2024? Check out these ELSS tax saving mutual funds.

1. Axis Long Term Equity Fund
2. ICICI Prudential Long Term Equity Fund
3. Tata India Tax Savings Fund
4. Franklin India Taxshield Fund
5. Canara Robeco Equity Tax Saver Fund
6. Aditya Birla Sun Life Tax Relief 96
7. DSP BlackRock Tax Saver Fund
8. Invesco India Tax Plan
9. JM Financial ELSS Fund
10. L&T Tax Advantage Fund

These schemes are the best tax saving mutual funds that have shown better performance and are considered to be the best of the industry by helping in saving taxes as well as giving good returns.

Conclusion

If you believe in saving money on tax but want growth for your wealth, then taxing or saving mutual funds would be a good choice. They save tax under Section 80C, have a relatively short lock-in period of three years and give higher returns as investments in equities may go up. Therefore, by selecting the top tax saving mutual funds, one could enjoy both tax benefits and wealth creation opportunities simultaneously.

For prospective and new investors looking to start with tax saving in mutual funds, want to explore best tax saving mutual funds or go for professional advice on how to save tax on mutual funds, SMC Global Securities can guide you for the same; thus, enabling you to make a proper decision while securing your financial future today.

FAQs on Tax Saving Mutual Funds

1. What are tax-saving mutual funds, and how do they function?

Tax saving mutual funds are otherwise known as Equity Linked Savings Schemes (ELSS). Equity Linked Savings Schemes, or ELSS, are equity mutual funds that fall under the umbrella of tax-benefiting Section 80C of the Income Tax Act. These funds afford a means to save taxes up to ₹1.5 lakhs. Their primary investment holdings are in equities, thus placing them much better value for money than other tax savings options.

2. What is the lock-in period of a tax saving mutual fund?

The lock-in period of a tax saving mutual fund is three years. In other words, you cannot withdraw prior to the completion of three years from the date of investment. It is relatively shorter compared to some of the different tax saving instruments, such as PPF (15 years) or NSC (5 years).

3. How do I pick a tax saving mutual fund to invest in?

Now, while choosing the best tax saving mutual funds, consider the following.

• Fund performance: Consider both the short-term, as well as long-term return generated by the fund in the past.
• Fund manager: Analyse the experience of the fund manager in comparison to his track record.
• Expense ratio: As there is a significantly varying range, compare the expense ratios of different funds because these can dent your overall returns.
• Investment strategy: Understand the investment philosophy of the fund so that it meets your risk tolerance.
• Diversification: Look for the diversification of the fund between sectors and companies. It reduces risk.

4. Are tax saving mutual funds available through SIPs?

Yes, one can invest in tax saving mutual funds through SIP. The whole thing is that with the help of these sums, you can create wealth steadily and reduce the impact of all the volatility variables of the market.

5. Are tax saving mutual fund investments risky?

Yes, tax-saving mutual funds are riskier compared to equity mutual funds because of higher returns. The investments made are also subject to the vagaries of the equity market. Your investments may gain or lose value about the respective market performances. You need to have a risk appetite and hold on to the investment for a long period to ensure that you reach your expected returns.

Author: All Content is verified by SMC Global Securities.