INTRODUCTION
There are many types of mutual funds available on the investment market. It is not a singular kind of investment. If you are looking to invest in a mutual fund that offers great tax benefits, then you are searching for what is known as an Equity Linked Savings Scheme (ELSS). Under Section 80C of the Indian Income Tax Act, an individual can ensure that up to Rs. 1,50,000 of their annual income is non-taxable.
To avail of this tax benefit, individuals must invest in certain assets, ELSS funds being one of them. To ensure that you redeem the tax benefits offered in an ELSS fund, investors must wait for one year. Investors who withdraw their investment before a year has passed must pay a 15% tax on capital gains.
How To Pick the Best Mutual Funds for Tax-Saving
Portfolio Composition: What kind of stocks are in the mutual fund you are considering? Are they small-cap, medium-cap, or large-cap? ELSS funds with many large-cap stocks are more likely to be stable in terms of return and risk. Funds with a larger concentration of small-cap and medium-cap funds are more volatile and carry a higher risk. Therefore, choose a fund that matches your financial goals and appetite for risk before coming to a decision.
Concentration and Diversification: A fund’s concentration mustn’t be overly focused on a few assets. Highly concentrated funds are prone to higher risk since the underperformance of a few key stocks can greatly reduce return. Additionally, it is also important that a fund is not over-diversified. Over-diversified funds are likely to dilute the return you will see on your investment. Therefore, choose a fund that is balanced in concentration and diversification.
Check the Expense Ratio of ELSS Fund: How much are you being charged for the management of the ELSS fund you have invested in? You can use an expense ratio to determine if it is to your liking. A higher expense ratio means that costs are higher, and reduces the return on your investment. Hence, you should look for a fund that has a low expense ratio and performs at a suitable level of return on investment.
Do Your Research: There is a lot of information that can be sourced from multiple areas. Conducting background research into the performance of a fund or the company managing it can help you make the right decisions. If you have already invested in an ELSS fund, you can compare its performance to other ELSS funds. By doing so, you can better improve your chances of finding the right fund for your investment goals. Moreover, taking the help of a financial or investment advisor would be a step in the right direction. Here is a list of some of the best mutual funds for tax savings that are commonly invested in:
- Axis Long-Term Equity Fund
- DSP Tax Saver Fund
- Mirae Asset Tax Saver Fund
- Invesco India Tax Plan Fund
- Canara Robeco Equity Tax Saver Fund
Other Types of Mutual Funds Which Offer Tax Benefits:
If you are looking for an additional type of mutual fund that can offer tax benefits, you can consider investing in a Flexi-cap fund. Flexi-cap funds invest in a diverse portfolio of equities and equity-related assets across a range of market capitalizations. Up to INR 1 lakh in long-term capital gains are tax-free, while gains over that amount are taxed at 10% without indexation. Interested investors can research and invest in multi-cap funds as well since they offer similar tax benefits. There are some distinctions between the two types of mutual funds, so investors should do their due diligence before coming to a decision.
Also Read: Unveiling the Best Small Cap Mutual Funds for High Growth Potential