Best Tax Saving Mutual Funds in India

Best Tax Saving Mutual Funds in India

In today’s world, there’s always a lot of speculation aboutthe type of investment you need to make for wealth creation or for your wealthto grow at a steady rate. The problem that each one of us face is the lack ofinformation in the market about the right kind of investment that willeventually go on to build our financial status.

Each one of us at some point in our life recently have heardabout mutual funds or have seen banners and advertisements regarding the same. So,what are mutual funds and how do you invest in them? These are some questionsthat we thought would be of relevance to you so we went ahead and demystifiedall your doubts. So, stop scratching your head and read away.

What are mutual funds?

A mutual fund is a professionally managed investment fundthat pools money from multiple investors to purchase securities. Theseinvestors can be retail or institutional in nature. Mutual funds haveadvantages and disadvantages compared to direct investing in individual securities.These fund investments are managed by professional fund managers who haveprecise knowledge of the industry through ample amount of research and are apart of the crux in the market.

What are the different types of mutual funds?

Primary structures of mutual funds include open-end fundsand closed-end funds, while there are other types of investment funds whichexist in the market as mentioned below

Open ended funds:

Many investments are not on a single product but on acollection of products. Just like we all love to keep different types of shoesand clothing in our wardrobes, these mutual funds function in the same way byinvesting in a collection of stocks and bonds to comprise the whole fund. Thesetypes of funds are available for subscription and repurchase on a continuousbasis and they do not have a fixed maturity period and are usually not listed onthe exchanges.

Closed ended funds:

Closed ended funds raise a fixed amount of capital throughan IPO (Initial Public Offer) and have a fixed maturity period. These funds arethen listed and traded like stocks on a stock exchange to provide investors anexit route before the maturity date. It only issues a set number of shares andalthough their value is also based on the NAV (net asset value), the actualprice of the fund is affected by supply and demand, allowing it to trade atprices above or below its real value.

Money market funds:

These are investment funds which are considered to be thesafest type of investment. In this type of fund, the money is invested inshort-term instruments, although the investor may not earn huge returns on thisone but it is still considered to be a safe place to put your money as theprincipal amount is not affected by the fluctuations in the market. Examples ofmoney market funds are Commercial Paper, Treasury bills from the government andCertificate of Deposits.

Fixed income funds:

These investment funds as the name suggests are the oneswhich gives returns on a regular basis on fixed intervals. The prime focus ofthis investment fund is to bring money into the fund through interest on aregular basis. The money is invested into government bonds and corporate bondsthat can yield high returns, however investment into government bonds isconsidered to be safer than the corporate ones.

Equity funds:

As the name suggests these are those investments funds thatinvest in the stock market. These funds are considered as high yielding fundswith high risk factor where the investor invests with a pre-requisite knowledgeof losing money as returns depend on market fluctuations, therefore they havebigger possibilities when it comes to return on investment which is generallyhigher than fixed income funds. Here the investors have the option of choosinga stock that interests them. Examples of equity funds are growth stocks whichdon’t pay dividends, income funds which pay large dividends, value stocks,large-cap stocks, mid-cap stocks and small cap stocks. An investor also has anoption of investing in a combination of all these.

Balanced funds:

Balance funds are the kind of investment funds which investin a combination of equity and fixed income securities. This strategy makesthese funds unique as they can churn out higher returns against the risk oflosing money. The idea is to divide the money among different types ofinvestment. The type of investment these funds put money into can be ofaggressive or conservative in nature, while the former holds more securitiesand less bonds while the latter holds lesser equites than bonds. Balanced fundstend to have more risk than fixed income funds but less risk than any equityinvestment.

Index funds:

This investment fund is a type of mutual fund with aportfolio that is designed to track and match the performance of a market indexsuch as the standard poor(S&P500). The value and return on the fundinvested depends solely on the rise or fall of the market index. This strategyprovides the investors with a lot of market exposure and low fund managementcost as fund managers have to replicate the performance of the particularmarket index so the extra cost of research in the stock selection process is cutdown. It also becomes easy for the investors to strategise their investment asthey too depend on the performance of the market index and no extra cost isinvolved.

Specialty funds:

Specialty funds are the type of mutual funds that focuses onequity investing within a specific industry. These funds are commonly referredto as sector funds because the investment is directed towards a specificsector. The most common sectors include energy, financial services, healthcare,real estate, technology and utilities.

Funds-of-funds:

As the name suggests this a type of investment fund thatinvests in other mutual fund schemes. The idea is to invest in a portfolio ofother investment funds rather than directly investing money into the stockmarket, bonds or other securities. This makes it easier for the investor to puthis money in a particular scheme as the asset allocation stands out to be muchbetter and safer than equity.

What are Mutual Fund Returns?

The most important factor while choosing a type of fund toinvest is the kind of return you can earn on it. All mutual funds provide 1year/ 3 year/ 5 year returns information. It is important to compare thesereturns with the overall market returns and also returns of other mutual fundsin the same category to get a better understanding of which mutual fund suitsyou better.

What are the benefits of investing in mutual funds?

There are a lot of factors that affect your investmentprocess while comparing mutual funds with one another. We have listed out fewimportant benefits for you:

1. Risk Diversification: Mutual funds help investorsdiversify unsystematic risks by investing in a diversified portfolio of stocksacross different sectors. Hence mutual fund risk is much lower than individualstocks

2. Smaller Capital outlay: With a much smaller capitaloutlay than other equity investments, there’s a lot more diversity in theportfolio of stocks so it stands out as a beneficial ownership for the investor

3. Investment expertise: Mutual funds are managed by professionalfund managers who have a lot of expertise while they manage your funds and giveyou an experienced layout of investments wisely to get favourable returns foryou

4. Variety of products: Mutual funds offer investors avariety of products to suit their risk-taking ability and investment objectives

5. Disciplined investment: Mutual funds encourage investorsto invest over a long time, which is essential to multiplying your returns.Systematic investment plans encourage investors to invest in a disciplinedmanner to meet their long-term financial objectives

What are the charges related to mutual funds?

There are different types of charges which may apply whenyou invest in a particular plan:

Entry Load:  Entryload refers to the fee charged to the investor while entering a scheme orjoining the company as an investor.

Exit Load: Exit load refers to the fee charged to theinvestor while exiting or redeeming a scheme.

One Time Charge: This charge is paid once while initiatingan investment as a transaction charge.

Recurring Charge: This charge is levied on the investormonthly/quarterly/annually to maintain their portfolio, marketing and toprovide advisory on their investment.

Management Fee: This fee is charged by the fund manager forhis management services.

Account Fee: This charge is levied by a few Asset managementcompanies (AMCs) if minimum balance criteria is not maintained, this amount isthen deducted by from the portfolio of the investor.

What are tax saving funds?

These funds invest in other funds. Similar to balancedfunds, they try to make asset allocation and diversification easier for theinvestor. This is an equity diversified fund and investors enjoy both thebenefits of capital appreciation, as well as tax benefits.

Below we have listed some tax saving funds to invest foryou:

1. Kotak Tax Saver ELSS:

Investment Objective: Enables investors to avail income taxrebate and generates long term capital appreciation from a diversifiedportfolio.

Launch Date: 23/11/2005

Fund Family: Kotak Mutual Fund

Lock-in Period: 3 years

Top 3 Holdings: Finance, Energy, Capital Goods &Engineering

Return %:

1-year: 6.82%

3-year: 11.33%

5-year: 17.26%

Minimum Investment: INR 500

2. Motilal Oswal Long Term Equity Fund:

Investment Objective: Generates long-term capitalappreciation from a diversified portfolio of equity related instruments.

Launch Date: 21/01/2015

Fund Family: Motilal Oswal Mutual Fund

Lock-in Period: 3 years

Top 3 Holdings: Finance, Banks, Auto

Return %:

1-year: 6.93%

3-year: 14.25%

5-year: N/A

Minimum Investment: INR 500

3. Tata India Tax Savings Fund:

Investment Objective: Provides income distribution and alsopays importance to capital appreciation.

Launch Date: 31/03/1996

Fund Family: Tata Mutual Fund

Lock-in Period: 3years

Top 3 Holdings: Finance, Consumer goods, Energy

Returns %:

1-year: 14.55%

3-year: 12.06%

5-year: 21.42%

Minimum Investment: INR 500

4. HDFC TaxSaver (ELSS)(G):

Investment Objective: Generating capital appreciation andincome from a portfolio, compromising predominantly of equity and related instruments.

Launch Date: 31/3/1996

Fund Family: HDFC Mutual Fund

Lock-in Period: 3years

Top 3 Holdings: Banks, Finance, Oil & gas

Returns %:

1-year: 14.55%

3-year: 10.08%

5-year: 17.54%

Minimum Investment: INR 500

5. Reliance Tax Saver (ELSS) funds:

Investment Objective: Catalyzes long-term capitalappreciation from a portfolio that is invested in equity and relatedinstruments.

Launch Date: 21/09/2005

Fund Family: Reliance Mutual Funds

Lock-in Period: 3 years

Top 3 Holdings: Banks, Industrial Capital Goods, Automotive

Returns %:

1-year: 8.56%

3-years: 9.21%

5-years: 21.59%

Minimum Investment: INR 500

All these queries are the most commonly occurring in aninvestor’s mind, we hope that the information in the above blog was sufficientfor you to understand the whole process.

We thank you for going through our blog, we at creditkarobelieve in bringing you accurate information for all your queries regarding allkinds of financial products. We hope you got significant amount of informationrelated to mutual funds investment. We wish to bring you more such content inthe future, till then invest wisely!

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