Mutual funds have emerged as an important investment avenue for individuals to park their money. With the right investment decisions, mutual funds can yield high returns and provide multiple benefits including diversification, flexibility, and access to professional investment management. One of the most popular types of mutual funds is tax saving mutual funds. These funds are designed to provide tax benefits to investors while generating consistent returns.
Tax Saving Mutual Funds
Tax-saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), enable investors to save tax up to INR 46,800 per annum under Section 80C of the Income Tax Act, 1961. Tax Saving mutual funds invest primarily in equities and equity-related instruments and come with a minimum lock-in period of three years.
The lock-in period is the minimum duration for which the investor cannot redeem the funds and no penalty will be levied in case it is done before the lock-in period. In comparison to other tax-saving options such as Fixed Deposits, PPFs, and National Savings Certificate (NSC), tax-saving mutual funds have the potential for higher returns as they are invested in equities and equity-related instruments. In addition to this, investment in tax-saving mutual funds can provide inflation-beating returns in the long run.
Investment in Tax Saving mutual funds can be made either through a Systematic Investment Plan (SIP) or as a lump sum payment. SIP is a disciplined investment approach where you invest a fixed amount of money at regular intervals over a predetermined period. It helps investors to invest without any stress of timing the market or worrying about short-term volatility. If you are a mutual fund investor, you have to know about SIP calculators and lumpsum calculators.
The Pros and Cons of Tax Saving Mutual Funds
The primary advantage of tax-saving mutual funds is the tax benefit that they provide. As mentioned earlier, investment in tax-saving mutual funds can reduce the taxable income of investors by INR 46,800 per annum. This reduction results in lower tax liability, which in turn increases the disposable income of individuals.
Apart from the tax benefits, tax saving mutual funds offer the advantage of steady capital appreciation. The long-term horizon of these funds provides a cushion to investors from the market volatility and delivers inflation-beating returns. Furthermore, investment in tax-saving mutual funds results in liquidity at the completion of the lock-in period. The invested amount along with the returns can be redeemed after 3 years, generating regular income for the investor.
However, there are certain risks involved with investing in equities and equity-related instruments, which may result in lower returns or even losses. Also, the NAV (Net Asset Value) of these funds can fluctuate depending on market performance and hence one must be prepared for short-term volatility. Investors should also carefully assess their risk profile and investment goals in conjunction with the fund’s investment objective before investing in tax-saving mutual funds.
Calculating the Returns of Tax Saving Mutual Funds
To understand the power of investing in Tax Saving mutual funds, let’s consider an example where an investor invests INR 1,50,000 in a tax-saving mutual fund through SIP for a period of 3 years. Assuming an annual return of 12%, the investment can generate the following returns over a 3- year period:
– Year 1: INR 51,467
– Year 2: INR 1,07,524
– Year 3: INR 1,72,306
The total investment by the end of 3 years would be INR 5,40,000, while the total return generated would be INR 3,31,297. This translates into a return of 61.3% over 3 years, which is significantly higher when compared to other tax-saving instruments such as Fixed Deposits or PPFs.
Conclusion
Investment in Tax Saving mutual funds can be a smart way to save tax and generate good returns simultaneously. The funds offer high growth potential, steady capital appreciation, and liquidity. However, it is important for the investors to assess their risk appetite, and financial goals and engage in professional financial planning before investing in tax-saving mutual funds.
To sum up, Tax Saving Mutual Funds presents a compelling case for individuals looking for tax-saving options that also provide the potential for higher returns. With careful evaluation and adherence to their investment goals, individuals can unleash the power of tax-saving mutual funds to achieve their financial objectives.
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