Importance of Tax Saver Funds

The amendments to the Union Budget 2020 have made it clear that mutual funds will be taxed in a classical manner. This means your returns will be added to your taxable income and taxed according to the slab rate. However, the Income Tax Act's Section 80C is a basket of goodies in which provisions for tax savings are provided. One such provision is tax-saving funds or Equity Linked Savings Scheme (ELSS).

Let’s understand these funds and their importance in detail.

What are tax-saving funds?

As the name suggests, tax-saving funds let you avail of income tax benefits on MF schemes. They are also termed as Equity Linked Savings Schemes (ELSS) as they invest a significant portion of their assets, as much as 60%, in equity-oriented funds.

If you invest in such funds, Section 80C states that you are eligible to avail tax exemptions, up to Rs. 1.5 lakhs, on your yearly taxable income. Tax saver funds come with a lock-in period of three years.

Additional Read: What Are ELSS Funds?

Advantages of tax saving funds

Given the high volatility of the equity market, the tax-saver investment option of ELSS is a much-needed relief. Besides the obvious reason for tax savings, here are a few other reasons to invest in these funds -

Short lock-in period

The lock-in period is merely three years, after which your investments become liquid. Plus, this helps you build a sense of financial discipline.

Higher returns

Since these funds predominantly invest their corpus in equity, you will invariably yield higher returns over the long term. However, if you are worried about the risk factor, don’t be! Just follow the simple practices of portfolio diversification and rebalancing from time to time, and you should see your investment grow significantly.

Long-term value

Equity funds are known to generate considerable wealth in the long run. So, if you do not redeem your funds after the lock-in period and allow them to grow, you will be able to meet your investment goals with ease.

Provision for systematic investments  

Tax-saver mutual funds offer a systematic mode of investment. If you don’t want to invest a lump sum yet, just start with the Systematic Investment Plan (SIP), in which you can invest a fixed sum every month. This amount can be as low as Rs. 500!

Are ELSS funds the ideal option for you?

The golden rule is that it is quite challenging to go wrong with three to four high-performing tax saving mutual funds in your investment portfolio. You should consider investing in these funds, particularly if –

• Your career has just taken flight, and you're in search of a safe and reliable investment option
• You are a risk-loving investor who is looking for risk diversification with some form of tax savings
• You want to avail of tax benefits and have no issues with staying invested for the mandatory lock-in period

Additional Read: Debunking 9 Popular Myths about ELSS funds

Over to you

Want to build a solid portfolio that has a few high-performing tax saving funds? Check out your options using Tata Capital’s Moneyfy app! See our top picks, compare different ELSS funds, match them to your investment goals, and explore different categories. When you’re all decided, put your money to work. Become investment and tax-savvy today!