When it comes to investing, many people seek options that not only provide good returns but also help in saving taxes. One such option is investing in tax-saving funds. These funds offer the benefit of tax savings under Section 80C of the Income Tax Act, while also providing an opportunity for wealth creation over time. In this article, we’ll explore what tax-saving funds are, the benefits of investing in them, and how to choose the right ones for your investment portfolio.
What are Tax-Saving Funds?
Tax-saving funds, also known as Equity-Linked Savings Schemes (ELSS), are a type of mutual fund that primarily invests in stocks. These funds offer a dual benefit: they allow investors to save taxes under Section 80C of the Income Tax Act, and they have the potential to deliver higher returns compared to traditional tax-saving instruments like Public Provident Fund (PPF) and fixed deposits.
One of the key features of tax-saving funds is the mandatory lock-in period of three years. This means that once you invest in these funds, you cannot withdraw your money for at least three years. This lock-in period is the shortest among all investment options under Section 80C, making these funds a preferred choice for many investors.
Benefits of Investing in Tax-Saving Funds
- Tax Benefits: One of the primary reasons to invest in tax-saving funds is the tax benefit they offer. Under Section 80C of the Income Tax Act, an individual can claim a deduction of up to INR 1.5 lakh from their taxable income by investing in these funds. This can result in significant tax savings, especially for those in higher tax brackets.
- Potential for Higher Returns: Unlike traditional tax-saving instruments such as PPF or fixed deposits, which offer fixed and relatively lower returns, tax-saving funds have the potential to deliver higher returns. This is because they primarily invest in stocks, which tend to provide better returns over the long term. However, it’s important to note that higher returns also come with higher risk, as these funds are subject to market volatility.
- Shortest Lock-in Period: Tax-saving funds have a lock-in period of just three years, which is the shortest among all options available under Section 80C. For example, PPF has a lock-in period of 15 years, and National Savings Certificates (NSC) have a lock-in period of 5 to 10 years. The shorter lock-in period gives investors more flexibility and allows them to access their money sooner.
- Professional Management: Tax-saving funds are managed by professional fund managers who have the expertise and experience to make investment decisions on behalf of the investors. They analyze various stocks, market conditions, and economic factors to build a diversified portfolio that aims to deliver good returns.
- Diversification: These funds invest in a variety of stocks across different sectors and industries. This diversification helps to reduce risk, as the performance of the fund is not dependent on a single stock or sector. Even if one sector underperforms, the fund can still generate returns if other sectors perform well.
How to Shortlist Tax-Saving Funds?
Selecting the right tax-saving fund is crucial to achieving your investment goals. Our Fund Analyzer team follows a thorough and robust process to identify the best funds in each category. Here’s a quick overview of the process:
- Proven Track Record: The first step in shortlisting funds is to select those with a proven track record. This means looking at funds that have consistently delivered good returns over a period of time, ideally over three to five years or more. Consistency in performance is a good indicator of a fund’s ability to navigate different market conditions.
- Fund Manager’s Performance and Strategy: A fund manager plays a crucial role in the performance of a tax-saving fund. Our team checks the fund manager’s past performance, their outlook towards the market, and their asset allocation strategy. A good fund manager should have a deep understanding of market dynamics and be able to adapt their strategy based on changing market conditions.
- Market Scenario Analysis: It’s important to analyze how a fund performs in different market scenarios. This involves examining the fund’s performance during both bullish and bearish market conditions and finding the correlation between the fund’s return and market volatility. Funds that can manage volatility well are generally considered more stable and reliable.
- Expense Ratio: The expense ratio is the annual fee charged by the fund for managing your investment. A lower expense ratio means lower costs for the investor, which can positively impact returns over the long term. Our team pays special attention to funds with a lower expense ratio while ensuring they maintain a high standard of management and performance.
Disclaimer
It’s important to note that while the above criteria help in shortlisting tax-saving funds, this list is illustrative and may not include all the funds that fall under this theme. By listing these funds, we are not recommending buying or selling any particular fund. This watchlist has been created for educational purposes and to provide an overview of funds related to this theme. Funds and themes may be added, modified, or removed at any time without prior notice.
Schemes Overview
Here are some tax-saving funds currently available in the market, along with their recent performance and details:
- Aditya Birla SL ELSS Tax Saver Fund (IDCW) – Direct Plan
- Net Asset Value (NAV): ₹462.77
- Assets Under Management (AUM): ₹16,830.53 Crores
- 1-Day Return: ▲0.2%
- Axis ELSS Tax Saver Fund (G) – Direct Plan
- NAV: ₹108.30
- AUM: ₹38,278.40 Crores
- 1-Day Return: ▲0.2%
- ICICI Pru ELSS Tax Saver Fund (G) – Direct Plan
- NAV: ₹1,032.74
- AUM: ₹14,563.56 Crores
- 1-Day Return: ▲0.2%
- Mirae Asset ELSS Tax Saver Fund (G) – Direct Plan
- NAV: ₹54.46
- AUM: ₹25,617.49 Crores
- 1-Day Return: ▲0.1%
- SBI Long Term Equity Fund (G) – Direct Plan
- NAV: ₹473.67
- AUM: ₹28,000.03 Crores
- 1-Day Return: ▼0.2%
These funds represent a range of options for investors looking to save taxes while also aiming for good returns. Each fund has its own unique strategy, fund manager, and market approach, making it essential for investors to do their own research and choose the one that aligns with their risk tolerance and financial goals.
Final Thoughts on Tax-Saving Investments
Investing in tax-saving funds can be a smart way to achieve the dual goals of wealth creation and tax savings. These funds provide a higher return potential compared to traditional tax-saving instruments, albeit with higher risks due to their equity exposure. The key to successful investing in tax-saving funds is to have a clear understanding of your financial goals, risk appetite, and the time horizon for your investment.
By selecting funds with a good track record, competent fund managers, and a well-defined investment strategy, you can make the most of the tax benefits while also building a robust investment portfolio. As with any investment, it is important to regularly review the performance of your funds and make adjustments if needed to ensure that you stay on track to meet your financial objectives.
Always remember, while tax savings are an important consideration, they should not be the sole factor driving your investment decisions. Your focus should always be on achieving your long-term financial goals, and tax-saving funds can be a valuable tool to help you get there.
ALSO READ: Investing in NFTs: 10 Mistakes to Avoid
