Tax Benefits of Investing in Mutual Funds

As the end of the financial year approaches, the scramble to find tax-saving options intensifies. For Indian investors, mutual funds offer a compelling way to reduce tax liability while potentially earning attractive returns. In this blog, we will explore how to save tax by investing in mutual funds, the options available, and their expected returns.

Understanding Tax-Saving Mutual Funds

Mutual funds are professionally managed investment funds that pool money from multiple investors to purchase securities. Among the various types of mutual funds, Equity Linked Savings Scheme (ELSS) is a popular choice for tax savings under Section 80C of the Income Tax Act, 1961.

Benefits of ELSS

1. Tax Deduction: Investments in ELSS qualify for a tax deduction of up to INR 1.5 lakh under Section 80C.
2. Short Lock-in Period: ELSS has a lock-in period of just three years, the shortest among all Section 80C options.
3. Potentially Higher Returns: Being equity-oriented, ELSS has the potential to offer higher returns compared to other tax-saving instruments like Public Provident Fund (PPF) and National Savings Certificate (NSC).

ELSS vs Other Tax-Saving Instruments

Let's compare ELSS with other popular Section 80C investments:

Investment Option	Lock-in Period	Expected Returns (per annum)	Risk Level
Equity Linked Savings Scheme (ELSS)	3 years	12-15%	High
Public Provident Fund (PPF)	15 years	7-8%	Low
National Savings Certificate (NSC)	5 years	6-7%	Low
Tax-saving Fixed Deposit	5 years	5-7%	Low
Employees' Provident Fund (EPF)	Until retirement	8-9%	Low

How to Invest in ELSS

Investing in ELSS is straightforward and can be done through various channels:

1. Direct Investment: You can invest directly through the mutual fund's website or office.
2. Brokers: Many brokers and financial advisors offer ELSS funds.
3. Online Platforms: Numerous online platforms and apps provide easy access to ELSS funds.

Choosing the Right ELSS Fund

When selecting an ELSS fund, consider the following factors:

1. Past Performance: While past performance does not guarantee future results, it provides insight into the fund's consistency.
2. Fund Manager's Expertise: The experience and track record of the fund manager play a crucial role in the fund's performance.
3. Expense Ratio: Lower expense ratios mean more of your money is being invested rather than used to cover administrative costs.
4. Portfolio Diversification: A well-diversified portfolio across sectors and companies can reduce risk.

Top 5 Well-Performing ELSS Funds

Based on recent performance, here are five well-performing ELSS funds:

1. Axis ELSS Tax Saver Fund - Growth
• 1-Year Return: ~26.58%
• 2-Year Return: ~24.33%
• 5-Year Return: ~14.88%
• Expense Ratio: 0.78%
2. Mirae Asset Tax Saver Fund
• 1-Year Return: ~35.83%
• 3-Year Return: ~28.57%
• 5-Year Return: ~20.51%
• Expense Ratio: 0.55%
3. Canara Robeco Equity Tax Saver Fund
• 1-Year Return: ~32.99%
• 3-Year Return: ~27.98%
• 5-Year Return: ~20.08%
• Expense Ratio: 0.70%
4. Invesco India Tax Plan
• 1-Year Return: ~40%
• 3-Year Return: ~31%
• 5-Year Return: ~18%
• Expense Ratio: 0.85%
5. DSP Tax Saver Fund
• 1-Year Return: ~46.17%
• 3-Year Return: ~34.42%
• 5-Year Return: ~21.6%
• Expense Ratio: 0.90%

Maximizing Tax Savings with SIPs

Systematic Investment Plans (SIPs) allow you to invest a fixed amount regularly in an ELSS fund. This not only makes investing more manageable but also helps in averaging out the cost of investment through market ups and downs.

Example of SIP in ELSS

Suppose you decide to invest INR 10,000 per month in an ELSS fund through SIP. Over a year, your total investment would be INR 1.2 lakh. This amount is eligible for a tax deduction under Section 80C, reducing your taxable income significantly.

Taxation of Returns from ELSS

While investments in ELSS offer tax benefits under Section 80C, it's essential to understand the tax implications on the returns:

1. Capital Gains: Long-term capital gains (LTCG) over INR 1 lakh in a financial year are taxed at 10%.
2. Dividends: Dividends received from ELSS funds are subject to Dividend Distribution Tax (DDT).
   
   

Conclusion

Investing in ELSS is a smart way to save tax while aiming for substantial growth in your investments. With a relatively short lock-in period and the potential for high returns, ELSS funds stand out among other tax-saving options. By carefully selecting the right ELSS fund and leveraging SIPs, you can maximize your tax savings and achieve your financial goals.

For personalized advice and to explore the best ELSS funds for your needs, feel free to contact our wealth advisory team. Save tax smartly and let your investments grow with the right mutual fund strategy!

At Labh, we are dedicated to helping you navigate the complexities of investing. Contact us today at tech@labh.io to learn more about how we can assist you in achieving financial success.