What Are Tax Saving Mutual Funds?

Investing in tax-saving mutual funds is a great way to earn long-term returns while also saving on taxes. Below are essential factors to consider when evaluating tax-saving mutual funds.

What Are Tax Saving Mutual Funds?

Tax saving mutual funds, also known as Equity-Linked Saving Schemes (ELSS), are open-ended equity funds that invest at least 80% of their total assets in equities and equity-related instruments. These funds come with a lock-in period of 3 years and allow investors to claim tax deductions under Section 80C of the Income Tax Act.

Things to Consider Before Investing in Tax Saving Mutual Funds

  • Investment Goals and Lock-in Period: Ensure your investment goals align with the fund’s objectives. Remember that there is a lock-in period of 3 years during which you cannot withdraw funds.
  • Performance of the Fund: Evaluate the fund’s historical performance before making an investment.
  • Tax Benefits: Investments in tax-saving mutual funds allow you to claim deductions under Section 80C. Long Term Capital Gains (LTCG) on tax-saving mutual funds up to Rs 1 lakh in a financial year are exempt from tax, while LTCG above Rs 1 lakh is taxed at 10%.
  • Risks: Since tax-saving mutual funds invest primarily in equities, they carry more risk than other tax-saving investment options. Conduct thorough research or consult a financial advisor to identify the best options.
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Why Invest in Tax Saving Mutual Funds?

  • Return on Investment (ROI): These mutual funds invest mainly in equity, offering the potential for higher returns compared to other tax-saving financial instruments. For instance, the SBI Long Term Equity Fund - Regular Plan - Growth has provided returns of 26.58%, 14.60%, and 16.77% over 3-year, 5-year, and 10-year periods, respectively.
  • Offers Flexibility: Tax-saving mutual funds offer flexibility, allowing you to start investing with a minimum amount as low as Rs 500. You can redeem your returns anytime after the lock-in period.
  • Maturity Tenure: ELSS funds have the shortest lock-in period (3 years) among all investment options under Section 80C. In contrast, Public Provident Fund (PPF) and tax-saver Fixed Deposits (FDs) have lock-in periods of 15 and 5 years, respectively.

How to Invest in Tax Saving Mutual Funds Through Wealthy

  1. Research, shortlist, and select a reputable Asset Management Company (AMC) on the Wealthy app.
  2. Complete mutual fund KYC compliance by submitting necessary documents like a photo, PAN, address proof, and other details.
  3. Log in to the Wealthy App after completing the KYC process.
  4. Search for tax-saving mutual funds and select the suitable fund for investment.
  5. Choose between a Systematic Investment Plan (SIP) or a lumpsum investment.
  6. After selecting your preferred choice, buy mutual fund units using net banking or UPI.

Investing in tax-saving mutual funds can be a strategic way to grow your wealth while enjoying tax benefits.

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