Mutual fund investing has become a hot entity among young investors, who use the tool as a long-term savings option with comparatively good returns along with tax saving benefits. If it comes with tax saving tools then they do not mind the risk factor associated with the great returns offered by mutual funds. But should you go for Tax Saving Mutual Funds or Equity Linked Mutual Funds (ELSS) as an investment option or keep the two separate?
Experts agree that taxes are only secondary and should not be the basis criteria when you are shopping for a good fund for your savings in the market. The important factor in choosing a mutual fund is whether the category of fund is suitable for your financial goals.
ELSS or Tax Saving Mutual Fund investments are a beneficial way to save tax under 80C of the Income Tax Act. Investments in ELSS over the past 10 years have earned an annual return of more than 14 per cent in the last 10 years and enable you to show tax exemption for investments up to a maximum of Rs. 1.5 lakh. These are pure equity funds and are similar to flexi-cap funds in their investments. In ELSS, a fund manager has the flexibility to invest in any ratio in companies of different sizes and sectors. But the benefits of ELSS come with a rider.
There is a mandatory lock-in period of three years for investing in ELSS. So whether you are investing in Monthly Systematic Investment Plan (SIP) or lump sum investment for tax saving purposes, you will not be able to redeem the invested amount for the next 3 years. For example, if you had invested 5,000 per month through one SIP in May 2019, three years for the first SIP installment to be completed in May 2022, for the second in June 2022, for the third in July 2022 and so on. So, if you don’t want to forget the money you save every year and go back only after 8-10 years to get returns, you will be a happy investor, but if you don’t want to redeem the invested amount in stages. are thinking. Short term goal, then ELSS is not what you should be considering. Hence, you can opt for a flexi-cap fund which will be free to encash your money in case of any emergency or if something goes wrong with the fund.
You should also consider paying taxes on your investment income while deciding your mutual fund strategy. Earlier, if you used to redeem your mutual funds after one year, then there was no tax on it, whereas now you may have to pay 10 percent tax on gains above Rs 1 lakh. Hence, long term equity mutual funds are your best bet to avoid tax and protect yourself from market volatility.
However, for a medium term horizon you can go for a mix of equity and fixed income where the investment ratio will depend on several factors – whether the target is negotiable, how much risk you are willing to take and so on. If the target is negotiable, you can allocate more to equities than might otherwise result in a bigger chunk of fixed income. Capital gains from non-equity funds are taxed at 20 per cent after three years after providing the benefit of indexation. If they are sold within three years, the profit is added to your income and taxed as per the applicable slab.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.