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Insights Into Tax Saving Mutual Funds

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By Author: Shreya
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Tax Saving Mutual Funds, popularly known as Equity-Linked Savings Schemes (ELSS), offers a dual advantage of potential returns and tax benefits. They provide an opportunity for capital appreciation and enable investors to save taxes under Section 80C of the Income Tax Act. However, there are other things an investor should know about them before investing.

So, here is a quick guide covering valuable insights into Tax Saving Mutual Funds to expand your understanding.

Tax Benefits under section 80C

Tax Saving Mutual Funds offer investors the benefit of tax exemption, as mentioned in Section 80C of the Income Tax Act. It allows them to deduct investments up to Rs. 1.5 lakh from their taxable income. This reduces the overall tax liability, providing an avenue for tax planning while fostering wealth creation. By investing in ELSS, individuals can lower their tax burden and simultaneously participate in the potential growth of the equity markets.

Lock-in period

Unlike traditional tax-saving instruments like ...
... Fixed Deposits or Public Provident Funds (PPF), Tax Saving Mutual Funds have a lock-in period. Investors cannot redeem their investments before the completion of three years. It is essential to know this lock-in period and plan investments accordingly. While it restricts liquidity in the short term, the lock-in period helps align investors' interests with long-term wealth creation, encouraging a disciplined approach to investing.

Potential for capital appreciation

Tax Saving Mutual Funds predominantly invest in equity instruments, aiming for long-term capital appreciation. They expose the stock market's growth potential, making them suitable for investors with a higher risk appetite and a long-term investment horizon. By investing in well-managed funds with a track record of delivering consistent returns, investors have the potential to earn higher returns compared to traditional tax-saving instruments.

SIP option

SIPs offer a convenient way to invest in Tax Saving Mutual Funds. By investing a small, fixed amount at regular intervals, investors can benefit from rupee-cost averaging and potentially reduce the impact of market volatility. They also allow investors to stagger their investments over the year, mitigating the risk of investing a lump sum during uncertain market conditions. In this manner, the SIP option ensures a disciplined and consistent investment approach.

Consideration of risk

Tax Saving Mutual Funds, being equity-oriented, carry a certain level of risk. The value of investments can fluctuate based on market movements, impacting the overall returns. Investors must understand their risk appetite and choose funds accordingly. Diversification across different funds and sectors can help mitigate risk. Additionally, a long-term investment horizon allows investors to ride out short-term market fluctuations and potentially benefit from the compounding effect, reducing the impact of volatility.

Monitoring and reviewing

Investors should keep track of the fund's performance, fund manager changes, and changes in their financial goals. The periodic review ensures that the chosen funds are aligned with the investor's risk profile and financial objectives. It also allows you to rebalance the portfolio, if need be, depending on changing market conditions or personal circumstances.

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