What are Tax Saving Mutual Funds? Which are the Best Tax Saver Mutual Funds in India?
Best Tax-Saving Mutual Funds: An Overview
Every day more and more people are getting aware of the term Mutual Funds. And as this number of people is growing, so is the investment in mutual funds. People are willing to take explore new investment arenas instead of keeping their money safe in the bank. Although, there is a certain number of people who invest their money in specific securities such as PPF only to reduce their tax liability and end up with lesser returns. But, did you know that there are tax-saving mutual funds too? Yes, you can invest in certain Mutual Funds and avail mutual fund tax benefits from them.
This article will not only answer the question: “What are Tax Saver Mutual Funds?” but also share the best tax saving mutual funds to minimize your taxes and maximize your returns.
What are Tax Saving Mutual Funds?
A Mutual Fund is a type of organization that collects and pools money from various people/investors, who share a common investment objective, and invests this amount in various financial securities such as stocks and bonds.
To answer the question, “What are tax saving funds?” – It is to simply invest in a fund that provides a benefit of tax saving.
Tax saving Mutual Fund is just like every other mutual fund, with an added benefit of tax saving. An individual can avail of tax benefits on such mutual funds under section 80C of the Indian Income Tax Act. Investing in tax-free mutual funds will not only help you earn higher returns, but also reduce your tax liability, thereby giving you double benefits.
How do Tax Saving Mutual Funds work?
This kind of investment is done in the form of a scheme, i.e., Mutual Fund Tax Saver Scheme and the majority of the tax saving Mutual Funds are Equity-Linked Savings Scheme (ELSS) as these mutual funds also invest at least 80% of their amount in equities. The only reason behind investing in equities is to be growth-oriented and earn higher returns.
Similar to any form of mutual fund, the organization pools money from various investments and segregates it into different securities to reduce the risk. For example: if one of the securities underperforms or incurs a loss, the other securities will be there to balance it out, thereby reducing the risk and increasing the returns.
Investments can be made in such ELSS similarly, but with a twist – there is a lock-in period for the majority of such investments, which mostly tends to be 3 years, which means that the amount invested can not be withdrawn before maturity.
The same investment can be made in the form of a lump sum payment or the form of a SIP. If one invests in a tax-saving SIP, then one can unlock the lock-in period of the amounts based on the installments. For example: If the first installment is paid on 1st January 2020 and the second is paid on 1st February 2020, then the first installment amount can be withdrawn on/after 1st January 2023 and the second installment can be withdrawn after 1st February 2023, i.e., after three years from the date of investment.
To withdraw any amount from the investment, the individual will need to submit a claim to the mutual fund provider and can expect the amount to be credited as soon as it is processed.
Benefits of Tax Saving Mutual Funds
As we have answered what tax-saving mutual funds are and how such a tax-saving mutual fund works, one should also know about the benefits of investing in such tax-saving funds. One of the obvious benefits is the tax saved on the tax benefit mutual fund. Although, there are a few more benefits, such as:
- Tax Benefits up to Rs. 1.5 Lakhs.
- No taxation on long-term capital gains.
- The minimum amount to be invested is just Rs. 500.
- Earn higher returns.
- Diversification of investments in the portfolio helps in reducing the risks.
- The shortest lock-in period of 3 years as compared to other tax-saving avenues.
- Investments can be made anytime during the year.
- Managed by professionally skilled fund managers with in-depth knowledge of the market.
- Option to invest every month (SIP) instead of a lump sum.
- Dividends can be withdrawn even during the lock-in period.
A lot of people have started to participate in the mutual fund tax saving process by investing their money in Tax Saver Mutual Fund and availing of the above-mentioned mutual funds tax benefits.
Best ELSS Mutual Funds in India
Various Mutual Fund organizations provide such Mutual Funds tax saving schemes. And all of them market their Fund as the best tax saver mutual fund. The following are the top 3 most famous tax-free mutual funds in India:
- IDFC Tax Advantage (ELSS) Fund – Direct Plan-Growth ELSS:
- This open-ended ELSS is offered by IDFC Mutual Fund.
- Fund size of ₹ 3692.39 Cr with an expense ratio of 1.97% and the NAV of ₹ 98.71
- 95.31% of the total amount is invested in domestic equities, out of which 50.21% is in Large Cap, 12.83% is in Mid Cap, and 20.56% is in Small Cap stocks.
- It has a 5-star Crisil Rank with a very high Risk-O-Meter.
- Hence, it is suitable for investors who are willing to take risk of moderate loss to earn higher returns.
- HDFC Tax Saver Fund – Direct Plan-Growth ELSS:
- This open-ended ELSS is offered by HDFC Mutual Fund.
- Fund size of ₹ 9408.98 Cr with an expense ratio of 1.24% and the NAV of ₹ 832.435
- 96.16% of the total amount is invested in domestic equities, out of which 67.85% is in Large Cap, 9.71% is in Mid Cap, and 4.05% is in Small Cap stocks.
- It has a 4-star Crisil Rank with a very high Risk-O-Meter.
- Hence, it is suitable for investors who are willing to take risk of moderate losses with a lock-in of 3 years.
- Quant Tax Plan – Direct Plan-Growth ELSS:
- This open-ended ELSS is offered by Quant Mutual Fund.
- Fund size of ₹ 1584.38 Cr with an expense ratio of 0.57% and the NAV of ₹ 251.1707
- 99.57% of the total amount is invested in domestic equities, out of which 62.51% is in Large Cap, 18.49% is in Mid Cap, and 11.53% is in Small Cap stocks.
- It has a 5-star Crisil Rank with a very high Risk-O-Meter.
- Hence, it is suitable for investors who are willing to take risk of moderate losses with a lock-in of 3 years and higher returns.
Many Fund houses provide Tax Saving Mutual Funds, but one should have the knowledge to select the best one based on their needs and goals, hence stating one Mutual Fund as the best tax-saving mutual fund, would not do justice to all.
One should keep its investment objective, time horizon, and risk tolerance in mind before selecting the Mutual Fund to invest in. One should also not forget to check the following features of the Mutual Funds before making a decision:
Historical returns, Assets Under Management (AUM): Higher the better, Portfolio Turnover Ratio, Expense Ratio: Lower the better, Sharpe Ratio: Higher the better, and Portfolio Concentration.
After comparing all the factors mentioned above, one can make the correct choice and maximize their returns while minimizing the taxes.
Is there a minimum amount that needs to be invested in Tax Saving Mutual Funds?
The minimum amount is just Rs. 500, although it can vary from fund house to fund house.
Should I invest in a lump sum or installments?
Every investor is different, has different needs, different goals, and a different mindset, so to say which one you should do would not do justice to all as it should be decided by you. Since both of these options are provided by the Fund Houses, you can select them at your convenience. Although keep in mind that if you opt for SIP, then each installment will be withdrawn when they mature individually, i.e., 3 years from the day you paid your installment.
Is there a maximum amount that can be invested in Tax Saving Mutual Funds?
There is no upper limit in this form of Mutual fund, although you can avail of Tax benefits only up to Rs. 1,50,000 of investment.
Is ELSS completely tax-free?
No, ELSS is not completely tax-free. An individual can avail of tax benefits only up to Rs. 1,50,000 of their total investment. Only the dividends received are completely tax-free.