Tax Saving Mutual Funds: Explore the List of Tax Saving Mutual Funds and Their Benefits
Saving taxes while potentially growing your wealth is a goal shared by many investors. Among the various tax-saving investment options, best tax saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), have gained significant popularity.
The top tax saving mutual funds offer a unique blend of tax benefits and market exposure, making them an attractive choice for investors seeking to optimise their tax liabilities. In this blog, we will delve into the world of tax saver mutual funds and explore their features, benefits, and considerations.
What are Tax Saving Mutual Funds?
Tax Saving Mutual Funds, also recognised as ELSS mutual funds, are mutual funds that offer tax benefits to investors under Section 80C of the Income Tax Act in India. These funds, including best ELSS and quant ELSS, primarily invest in equity shares of companies across different sectors. They are designed to provide long-term capital appreciation while offering tax deductions on the amount invested, positioning themselves as the best tax saver scheme for many investors.
Key features of tax-saving mutual funds
- Tax Benefits: Tax-saving mutual funds offer tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 lakhs on your investment in tax saver funds, including the ELSS tax saver fund.
- Investment Options: These funds offer a variety of investment options, so you can choose the one that best suits your investment goals and risk tolerance, making them some of the best tax saver plans available.
- Professional Management: These funds are professionally managed by experienced fund managers, ensuring that your money is strategically placed in equity ELSS and other assets.
- Liquidity: Tax saver SIP options within these funds are liquid, meaning that you can easily buy and sell your investments.
- Low Expense Ratio: These funds typically have a low expense ratio, ensuring that you keep more of your investment returns.
How Do They Work?
ELSS funds, including those aiming for long-term equity fund direct growth, work by pooling money from a large number of investors and investing it in a diversified portfolio of equity and equity-related instruments. The fund manager will typically invest in a mix of large-cap, mid-cap, and small-cap stocks, as well as in other equity-related instruments such as equity-linked debt funds and exchange-traded funds (ETFs).
The performance of ELSS funds will depend on the performance of the underlying equity market. In the long term, equity markets, including those focused on taxation of equity mutual funds, have historically delivered higher returns than other asset classes such as fixed income. However, equity markets are also more volatile, which means that there is a risk of losing money if you invest in ELSS tax saving options.
Eligibility Criteria and Lock-In Period
Here are the eligibility criteria and lock-in period for tax-saving mutual funds (ELSS):
Eligibility criteria
- You must be a resident Indian.
- You must have a PAN number.
- You must invest in the fund through a registered broker or distributor.
Lock-in period
ELSS funds have a lock-in period of three years. This means that you cannot withdraw your money from the fund within three years of investing. If you do withdraw your money before the lock-in period is over, you will be liable to pay a penalty of 1% per month on the amount withdrawn. This makes them a strategic tax saving scheme despite the restriction.
Popular Tax Saving Mutual Funds 2024
Here is the list of the top 10 tax saving mutual funds:
| Tax Saving Mutual Funds | Explanation |
| Mirae Asset ELSS Tax Saver Fund | This fund is managed by Mirae Asset Global Investments since 2008. The fund’s expense ratio is 0.59%. |
| SBI Long Term Equity Fund | SBI Long Term Equity Fund (Direct Growth) is managed by SBI Mutual Fund since its inception in 1993. The fund’s expense ratio is 0.98%. |
| Nippon India Tax Saver Fund | This direct growth fund is managed by Nippon India Mutual Fund since 2005. The fund’s expense ratio is 1.08%. |
| DSP ELSS Tax Saver Fund | DSP ELSS Tax Saver Fund (Direct Growth) is managed by DSP Investment Advisors since its inception in 2006. The fund’s expense ratio is 0.68%. |
| HDFC Tax saver | This fund is managed by HDFC Asset Management since its inception in 2006. The fund’s expense ratio is 1.14%. |
| ICICI Pru ELSS Tax Saver Fund | ICICI Pru ELSS Tax Saver Fund is managed by ICICI Prudential Asset Management since 2006. The fund’s expense ratio is 1.03% |
| Quant Tax Saver Fund | This fund is managed by Quant Mutual Fund since its inception in 2010. The fund’s expense ratio is 0.76%. |
| Canara Rob Tax Saver | This fund is managed by Canara Robeco Asset Management since 2008. The fund’s expense ratio is 0.57%. |
| Franklin India ELSS Tax Saver Fund | Franklin India ELSS Tax Saver Fund is launched by Franklin Templeton Mutual Fund since its inception in 1996. The fund’s expense ratio is 1.09%. |
| Bandhan ELSS Tax Saver Fund | Bandhan ELSS Tax Saver Fund is managed by Bandhan Mutual Fund since 2008. The fund’s expense ratio is 0.59%. |
Types of Tax Saving Mutual Funds
There are primarily three types of tax saving funds available in India, offering a range of benefits for those looking to optimise their tax savings through best tax saving mutual funds and top tax saving mutual funds.
Equity Linked Saving Schemes (ELSS)
These funds, often highlighted as the best ELSS for investing in the shares of various companies, offer the potential for higher returns over the long term but come with higher risks. ELSS tax saving mutual funds have the advantage of the shortest lock-in period of just three years, which means you can access your money relatively sooner if needed, making them a popular choice among tax saver mutual funds. Plus, they offer tax benefits under Section 80C of the Income Tax Act, positioning them as a prime tax saving scheme.
Debt-Oriented Tax Saving Funds
If you prefer a more conservative approach, these funds primarily invest in debt instruments like government securities and corporate bonds, aiming to provide stable returns with lower volatility compared to equity funds. They’re considered less risky, but with a typically lower potential for returns. Like ELSS funds, they also have a three-year lock-in period, offering a tax saver scheme for conservative investors.
Hybrid Tax Saving Funds
These funds offer a balanced approach by investing in a mix of stocks and debt securities, providing a diversified portfolio. This balance allows for potential capital appreciation through equities and stability through debt investments, making them an attractive tax saver plan for those seeking a mix of growth and security. The allocation between equities and debt may vary depending on market conditions and the fund manager’s strategy. Like the other two types, they also have a three-year lock-in period.
How to choose best tax saving mutual funds?
To effectively choose the best tax-saving mutual funds, you can follow a step-by-step approach that simplifies the process while taking into account the important factors. Here’s one way to go about it:
Step 1: Define your financial goals
- Short-term vs. Long-term: ELSS funds have a 3-year lock-in, but consider your goals beyond that. Are you saving for retirement, a house, or education? Deciding on this can influence the type of fund you invest in.
Step 2: Determine Your Risk Tolerance
- Equity investments can be volatile. Hence, finding out your risk tolerance levels before you decide to invest can help you in the long term.
Step 3: Research Fund Performance
- Historical Returns: Look at 3, 5, and 10-year performance data. It can help you understand the fund’s performance over the years.
- Compare with Benchmarks: See how the fund performs relative to its benchmark and category averages.
Step 4: Evaluate the Fund Manager(s)
- Experience and Track Record: A seasoned fund manager with a history of navigating market cycles can significantly impact fund performance.
Step 5: Analyse the Fund’s Portfolio
- Diversification: Ensure the fund has a diversified portfolio across sectors and companies to mitigate risk.
- Investment Strategy: Growth, value, or a mix? Choose one that matches your own investment philosophy and goals.
Step 6: Check Costs and Expenses
- Expense Ratio: Lower expense ratios can lead to higher net returns. However, it is not worthwhile to compromise on the fund’s quality for a lower cost.
Step 7: Look at Tax Implications
Confirm the ELSS fund offers the tax deductions you’re interested in fall under Section 80C. This may help you with many benefits that come along with that investment bucket.
Step 8: Read Reviews and Ratings
Financial experts and fund ratings can offer insights into the fund’s performance and management quality.
Step 9: Diversify Your Investments
- Spread Your Investment: Consider investing in more than one ELSS fund to spread risk and capitalise on different management strategies. For this, it is worthwhile to consult a financial advisor before investing.
Step 10: Regular Review and Rebalance
- Monitor Performance: Keep an eye on your investments and market conditions. Be prepared to make adjustments if your financial goals or risk tolerance changes.
By following these steps, you can systematically analyse and select a tax-saving mutual fund that aligns with your financial goals, risk tolerance, and investment strategy, optimising for both tax savings and potential for growth. Remember, investing in mutual funds requires diligence and sometimes patience to see significant returns, especially in market-linked products like ELSS.
How to Invest in Tax-Saving Mutual Funds?
Investing in tax saver mutual funds, including the best tax saver plan and ELSS tax saver fund, follows a straightforward process that can lead to significant tax benefits under Section 80C.
- Choose a Fund House or AMC: Choose a reputable fund house or asset management company. Do your research and compare different fund houses before choosing one. Look for a fund house with a good track record and a strong investment philosophy.
- Open a Mutual Fund Account: Open your mutual fund investment account. You can open a mutual fund investment account online or at a bank or financial institution. You will need to provide your personal information, proof of identity and address.
- Choose the Right Fund: There are many different tax-saving mutual funds available, so it is important to choose one that is right for you. Consider your investment goals, risk tolerance, and time horizon.
- Invest Through a Lump Sum or Systematic Investment Plan (SIP): You can invest in a tax-saving mutual fund through a lump sum or a systematic investment plan (SIP). A lump sum investment is a one-time investment, while a SIP is a recurring investment that is made on a monthly or quarterly basis.
Advantages of Investing in Tax Saving Mutual Funds
There are many advantages to investing in tax saving funds (ELSS). Some of the key advantages include:
- Tax Benefits: Mutual funds under 80C of the Income Tax Act, 1961 offer tax benefits. This means that you can claim a deduction of up to ₹1.5 lakhs on your investment in ELSS funds from your taxable income.
- Potential for High Returns: ELSS funds invest in equity markets, which have the potential to generate higher returns than other asset classes, such as fixed deposits or bonds. Over the long term, ELSS funds have the potential to generate returns of 15-20%.
- Flexibility: ELSS funds have a lock-in period of 3 years, which is the shortest lock-in period for any tax saving investment. This gives you more flexibility to withdraw your money if you need it.
- Convenience: These mutual funds can be easily bought and sold through a variety of channels, such as online portals, mutual fund houses, and banks. This makes it easy to invest in ELSS funds even if you don’t have a lot of time or expertise.
Disadvantages of Investing in Tax Saving Mutual Funds
While ELSS tax saving mutual funds and tax saver funds offer numerous advantages, they also come with risks and considerations.
- High Risk: Tax saving funds are equity-oriented funds, which means that they are subject to market volatility. This means that your investment can go down in value as well as up.
- Lock-in Period: Tax saving mutual funds have a lock-in period of 3 years. This means that you cannot withdraw your money from the fund before the end of the lock-in period without incurring penalties.
- Entry and Exit Loads: Some tax saving mutual funds charge entry and exit loads. These are fees that you have to pay when you buy or sell units of the fund.
- Management Fees: Tax-saving mutual funds charge management fees. These are fees that are paid to the fund manager and other fund expenses.
Factors to Consider When Investing in Tax-Saving Mutual Funds
Here are the factors that you should consider before investing in best ELSS or tax saving scheme:
- Fund Performance and Historical Returns: This is a good indicator of how the fund has performed in the past. However, it is important to remember that past performance is not a guarantee of future results.
- Fund Manager Expertise and Track Record: The fund manager is responsible for making investment decisions for the fund. Hence, it is important to choose a fund manager who has experience and a proven track record of success.
- Investment Objective and Risk Profile: Even the top tax saver mutual fund can have different investment objectives and risk profiles. Therefore, it is important to choose a fund that aligns with your own investment objectives and risk tolerance.
- Expense Ratio and Associated Costs: The expense ratio is a measure of the fees charged by the fund. Hence, it is important to choose a fund with a low expense ratio.
Taxation of Returns From Tax Saving Mutual Funds
Here are the rules for the taxation of returns from tax saving mutual funds:
A. Long-Term Capital Gains Tax
When you invest in tax saving mutual funds, you enjoy the benefit of long-term capital gains tax. If you hold your investments for more than one year, any profits or gains you make upon redemption are classified as long-term capital gains.
Currently, long-term capital gains on equity-oriented tax saving funds are taxed at a rate of 10% without indexation. However, please note that the tax laws and rates may vary, so it’s always advisable to consult with a tax professional or refer to the latest regulations.
B. Dividend Distribution Tax (if applicable)
Some tax saving mutual funds may distribute dividends to investors. In such cases, the mutual fund company is liable to pay dividend distribution tax (DDT) before distributing the dividends to the investors.
The DDT is deducted at the source, which means that the dividends you receive are already after the tax deduction. The DDT rates and regulations can vary, so it’s important to check with the mutual fund company or refer to the latest tax rules.
C. Tax Implications at the Time of Redemption
When you redeem your tax saving mutual fund units, the gains or profits you make are subject to taxation. As mentioned earlier, if you hold your investments for more than one year, the gains are considered as long-term capital gains and taxed accordingly.
However, if you redeem your investments before one year, the gains will be treated as short-term capital gains and taxed at the applicable rate for short-term capital gains.
Who Should Invest in Tax Saving Funds?
- First-Time Equity Investors: Individuals new to the equity market can find ELSS funds an appealing entry point. These funds not only provide exposure to equities but also offer tax benefits, making them an excellent starting point for building a diverse portfolio.
- Taxpayers Seeking Deductions: For salaried and self-employed individuals looking to maximise their tax savings under Section 80C, ELSS tax-saving mutual funds present an attractive option. These schemes allow investors to claim deductions up to ₹1.5 lakh per annum, thereby reducing their taxable income.
- Long-Term Wealth Builders: Given their equity component, ELSS funds are well-suited for investors with a long-term investment horizon. Those aiming for significant capital appreciation over time, while also reaping tax benefits, should consider these funds.
- Risk-Tolerant Investors: ELSS funds, being equity-oriented, come with a degree of market risk. Individuals comfortable with market volatility and looking for higher returns compared to fixed-income tax-saving instruments may find ELSS schemes appealing.
- Systematic Investment Planners: Investors preferring systematic investments can opt for Tax Saver SIPs (Systematic Investment Plans) in ELSS funds. This approach not only disciplines the investment process but also helps in averaging the cost of investment over time.
Tips for Maximising Returns and Minimising Risks
Here are some tips to maximise your investment in tax saver SIP plans or ELSS schemes.
A. Diversify Your Tax-Saving Mutual Funds
It’s like the saying goes, “Don’t put all your eggs in one basket.” Diversifying your investments across different tax-saving mutual funds is a smart move. By spreading your investments across various funds, such as equity and debt funds, you reduce the risk of being heavily dependent on one particular fund or sector. This way, if one fund underperforms, others may balance it out and keep your overall portfolio on track.
B. Keep an Eye on Your Portfolio
Stay on top of your tax-saving mutual fund portfolio. Regularly review how your funds are performing, check their asset allocation, and keep an eye on any market or economic changes. Being proactive and aware of your portfolio’s status allows you to make informed decisions. If necessary, you can make adjustments or even switch funds to ensure your investments align with your goals.
C. Take the Long-Term Approach and Stick With It
Rome wasn’t built in a day, and neither are your investment returns. Take a systematic investment approach by setting up a recurring investment plan, like a systematic investment plan (SIP). By investing consistently over time, you can benefit from the concept of rupee cost averaging.
This helps you buy more units when prices are low and fewer units when prices are high, reducing the impact of short-term market volatility. Remember, tax-saving mutual funds are best suited for the long term, allowing your investments to grow through the power of compounding.
To Wrap It Up…
Tax Saving Mutual Funds (ELSS) offer a compelling investment option for individuals looking to save taxes while potentially earning higher returns. These funds not only provide tax deductions under Section 80C but also offer the benefits of equity investments.
By investing in Tax Saving Mutual Funds, investors can benefit from the expertise of professional fund managers who carefully select and manage a diversified portfolio of equities. The mandatory lock-in period encourages long-term investing, aligning with the goal of wealth creation.
However, it’s crucial to remember that investing in Tax Saving Mutual Funds involves market risks, and past performance may not guarantee future results. Investors should consider their risk tolerance, investment objectives, and financial goals before making any investment decisions.
FAQs
Tax Saving Mutual Funds are mutual funds that offer tax benefits under Section 80C of the Income Tax Act, India. These funds primarily invest in equity and equity-related instruments, providing investors with the dual advantage of potential capital appreciation and tax savings.
No, ELSS funds are not tax-free. While investments in ELSS funds qualify for tax deductions under Section 80C, the gains made from these funds are subject to taxation. Long-term capital gains (investments held for more than one year) up to Rs. 1 lakh are currently tax-free, and any gains above this limit are taxed at 10%.
The maximum limit for tax deductions under Section 80C, which includes ELSS investments, is Rs. 1.5 lakh per financial year.
Yes, certain mutual fund investments are eligible for tax savings under Section 80C. Tax Saving Mutual Funds, specifically ELSS funds, qualify for tax deductions up to Rs. 1.5 lakh. Other mutual funds, such as debt funds or equity funds, do not offer specific tax benefits.
The choice between ELSS and Public Provident Fund (PPF) depends on individual choices and financial goals. ELSS offers potentially higher returns as it primarily invests in equities, but it comes with market-related risks. PPF, on the other hand, is a fixed-income instrument with a guaranteed return but offers lower returns compared to equities.
Equity-Linked Savings Schemes (ELSS) mutual funds, while offering tax-saving benefits under Section 80C of the Income Tax Act, are subject to market risks due to their equity-oriented nature. Investors should consider their risk tolerance and investment horizon, as ELSS funds typically exhibit volatility akin to equity markets.
The best mutual fund for tax savers is often considered to be ELSS (Equity Linked Savings Scheme) due to its dual benefits of tax savings under Section 80C and potential for high returns through equity investments.
The list of mutual funds eligible for 80C deduction is mentioned below.
– Mirae Asset ELSS Tax Saver Fund
– SBI Long Term Equity Fund
– Nippon India Tax Saver Fund
– DSP ELSS Tax Saver Fund
– HDFC Tax saver
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