How Tax Saving Mutual Funds Work?

Investment in mutual funds is one of the leading trends today. Thanks to the ever-growing reach of media, people today are more than aware of the knick-knacks of mutual fund schemes. Additionally, what makes mutual funds especially popular is their user-friendliness and customer oriented essentials, not to mention such tenets as low risk and relatively high returns.

One of the leading aspects of tax-saving mutual fund schemes is the risk choice furnished by them. Additionally, to continue in the same strain, taking cognizance of one’s risk appetite constitutes a fundamental portion of any investment whatsoever. So far as mutual fund schemes are concerned, most people generally tend to invest in low-risk schemes to suit their respective risk taking abilities. However, the point to be underscored is that a potential investor should be perfectly aware of his or her own risk taking attitude before deciding to invest.

Tax Saving Mutual Funds Characteristics

In order for the potential investor to comprehend the core essentials of tax saving mutual funds, it is imperative to note the most fundamental characteristics of the same. The following are some of the most elementary features of mutual funds with tax benefits:

• • As stated earlier, the fundamental variant of a tax saving mutual fund is the ELSS. Certainly, there may be exceptions to the same. However, ELSS is the conventional clone of the tax saving mutual fund. Additionally, it is important to keep in mind that broadly all mutual fund schemes are open-ended.
  • It is vital to keep in mind that there are many mutual fund schemes which may require the concerned investor to shell out a specified amount of money to the concerned fund furnishers. Also known as the entry load/exit load, these are common to a majority of mutual fund schemes.
  • Broadly speaking, the specified lock-in period of a majority of conventional tax saving mutual fund schemes is not more than three years. A lock-in period is defined as the span of time during which the concerned investor cannot withdraw his or her money.
  • As mentioned before, the risk ratio of tax saving mutual fund schemes counts on the subjective preference of the concerned investor. In other words, depending on the types of investment, the risk could either be low, medium or high.
  • Importantly, a potential investor should not expect quintessential tax benefits on indefinite amounts. While it is true that there are no upper limits specified, it is important to underscore the fact that tax benefits will apply only to investments which have not exceeded Rs. 1 lakh.
  • So far as the limits of the investment are concerned, the lower limit, generally speaking, is Rs. 500. There are no upper limits for making investments.

Those above are only some of the most fundamental aspects of a conventional tax saving mutual fund instrument. Essentially, the characteristic entry/exit feature may not be considered a potential impediment. Also, since tax-saving mutual fund schemes are usually open-ended ones, they come equipped with the related nomination advantages.

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To continue in the same strain, tax-saving mutual fund schemes generally belong to the likes of ELSS and open-ended schemes. Consequently, they function in accordance with the essentials of a typical open-ended type. Subsequently, there are two types of schemes: growth scheme and dividend scheme.

Growth schemes and dividend schemes tend to vary on certain core aspects. For instance, dividend schemes do not usually tend to constitute a particular lock-in period. Additionally, they automatically become eligible for all the relevant tax benefits under Section 80C of the Income Tax Act of India. Intriguingly, what is special about a dividend scheme is that it allows the concerned investor to earn a specified amount of additional income. On the contrary, growth schemes are less popular for want of such sterling features.

Mutual Funds with Tax Benefits

Are mutual funds with tax benefits not with blemish? Importantly, in order for the potential insured to pick up the most appropriate scheme, it is imperative to factor in both merits and demerits of the subject.

Although it might appear that the benefits outstrip the demerits, it is none the less significant to consider the grey areas in order to get a full picture of one’s investment future. To start with: ELSS, specifically speaking, is not suitable especially to the common lot generally averse towards taking risks.

As mentioned before, a majority of tax saving mutual funds are ELSS/open-ended, it is important to take it into consideration. Broadly speaking, ELSS investors depend heavily on the volatile stock winds. Indeed, the very fluctuation inherent in such schemes is a considerable limitation.

Additionally, it is important to keep in mind that one of the leading demerits of an ELSS is that the investor may not withdraw any amount of money before the date of maturity. On top of that, as per the latest DTC draft revisions, ELSS is proposed not to come within the purview of the exemption of tax under the Income Tax Act of India.

Those above are only some of the fundamentally recognized limitations of tax saver mutual funds. Coupled with the performance ratio of the stock markets, most investors tend to avoid such schemes primarily in this regard. And, to round it off, it is essential to keep in mind that eventually, the relevance of ELSS as tax saving instruments depends on the elements in the DTC.

Conclusion

Clearly, tax-saving mutual funds hold special sway among conventional investors across large swathes of the country. Indeed, the urge to save tax as much as possible is not only natural but legitimate. Additionally, it is equally significant to consider the fact that a majority of tax saving instruments doing the rounds in the market holds appeal so far as their inherent liquidity aspects are concerned.

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