Overview:
Tax saving mutual funds are those which invest at least 80% of their assets in equities. The tax saving mutual funds are essentially the equity-linked saving schemes (ELSS) which offer tax benefits to the investors under Section 80C of the Income Tax Act, 1961. The lock-in period actually inculcates a good habit among investors to thrive for long-term investing while putting their money in an equity related instrument.
Risk & Return aspects:
These tax saving mutual funds also offer the benefit of maximizing portfolio returns over a long term to an investor. However, investors should also be wary of the risk associated with equity investing as compared to the other tax saving fixed-income instruments like Public Provident Fund (PPF) & others.
Portfolio allocation:
A fund manager enjoys complete freedom & flexibility to invest across sectors and market caps - large, mid & small in this diversified class of funds. It is also noteworthy to mention that most of the funds' portfolio allocation in this category is high on large-cap companies. Therefore, in the short-term these funds can be volatile, however over a long-term risk is mitigated substantially.
Top Tax Saving mutual funds are the top rated ones which have consistently given superior returns in the defined category.
Key Highlights:
- Lock-in period of 3 years, shortest amongst all Section 80C tax saving options
- Potential of earning inflation-beating & superior returns thus making ELSS a stand-out amongst all tax saving investments
- Offers the dual benefits of tax saving and wealth creation in the long term
- Suitable for aggressive class of investors having the appetite for taking higher risk, tolerance for enduring market volatility and stay invested with a long investment horizon of at least 5 years
- Well suited for first time investors too for learning the nuances of equity investing while saving on taxes at the same time
- Gains on equity funds are subject to taxation @ 15% for holding period less than 1 year and @ 10% for more than a year if gains are more than 1 lakh
FAQs
- 1) Which mutual funds are best for tax saving?
As on March 7, 2022; the 5 best tax saving mutual funds purely on the basis of returns for different time periods are as follows:
- For 1 year:- Quant Tax Plan (31.71%), PGIM India ELSS Tax Saver Fund (17.53%), IDFC Tax Advantage (ELSS) (16.67%), BOI AXA Tax Advantage (13.09%), DSP Tax Saver (11.85%).
- For 3 years:- Quant Tax Plan (33.04%), BOI AXA Tax Advantage (23.75%), Mirae Asset Tax Saver Fund (20.04%), Canara Robeco Equity Tax Saver (19.84%), IDFC Tax Advantage (ELSS) (18.89%).
- For 5 years:- Quant Tax Plan (22.50%), BOI AXA Tax Advantage (18.26%), Mirae Asset Tax Saver Fund (18.22%), Canara Robeco Equity Tax Saver (17.26%), IDFC Tax Advantage (ELSS) (16.24%).
- Since Inception:- Quant Tax Plan (20.40%), Mirae Asset Tax Saver Fund (19.73%), Axis Long Term Equity (18.20%), IDFC Tax Advantage (ELSS) (17.35%), BOI AXA Tax Advantage (17.03%).
Please note that:
- The returns of the funds mentioned above are for the Direct options of the Growth plans.
- While return is an important factor for deciding a mutual fund, the best way to do so is choosing an investment goal first and aligning it with a fund based on your risk appetite. Other factors like expense ratio, risk measures, portfolio allocation play an equally important role along with the returns generated by a fund. It is therefore advised to consult with your investment advisor before making any investment decision.
- 2) What are the investment modes available for investing into an equity-linked saving scheme (ELSS)?
The investors can invest into ELSS through 2 investment routes - Systematic Investment Plan (SIP) & Lump-sum. Through SIP, an investor can invest a fixed installment (which may be as low as Rs. 500 monthly) at regular intervals which may be monthly, quarterly or annually. The investors get the benefit of rupee cost averaging and the power of compounding through the SIP route. Lump-sum is primarily a one-time investment which an investor makes in a given financial year (FY).
- 3) Do tax saving mutual funds offer better returns than other tax saving options like PPF & others?
As of March 1, 2022; the category returns of ELSS for different time periods - 1yr, 3yr & 5yr are respectively 18.96%, 18.76% & 14.38%. While the current return of a PPF which is a popular fixed-income tax saving instrument stands at 7.1% (7.6% at present for Sukanya Samriddhi Yojana). As per financial experts, a ULIP plan on an average generates a return of 10-12% for a 10 year investment period.
- 4) What are the risks associated with various tax saving instruments?
Investments into ELSS & ULIP generally come at a high risk since these are associated with investments into equity-related instruments. However, the fixed-income instruments too are not completely risk free. Government reviews the interest rate on such schemes periodically (every quarter generally) and the consequences of the bearing of interest-rate fluctuations on them can't be ignored.