In recent years, mutual funds as an investment option have gained immense popularity among investors. Be it SIPs (Systematic Investment Plans) or direct mutual fund investments, they are receiving much attention from investors today.
The Indian mutual fund industry has grown tremendously in the last ten years. As of January 31, 2012, the AUM (assets under management) was Rs. 6.59 trillion, and on January 31, 2022, it was Rs. 38.01 trillion, which is a 5½ fold increase. In a scenario where people are investing money for various purposes such as retirement corpus, children’s education, home purchase, marriage, and so on, mutual funds can help with each of these goals.
A mutual fund is an investment vehicle that collects money from many investors and invests in various instruments such as bonds, gold, stocks, etc. to make a steady return over a period. Investing in mutual funds is a great way to grow wealth while also keeping the investments diversified.
Why is investing in mutual funds beneficial?
A mutual fund helps investors gain exposure to bonds, stocks and other assets without investing in each asset individually. Mutual funds allow pooling money with other investors, thereby spreading risk and avoiding the common pitfalls of individual stocks or bonds.
The funds in Mutual Funds are managed by a professional fund manager who invests in the underlying securities and generates returns for the investors who have contributed capital to the fund. They are instrumental in enabling the commoner to invest without worrying about the intricacies of investing. One of the most significant advantages of mutual funds is that investors do not need specialized knowledge or research on what stocks or bonds they can invest in.
The personalized wealth custodian at Rurash will summarize all the information and helps investors decide which bonds and stocks or assets are right fit for investment, then invest the money in these asset class. This simplifies financial planning for investors while the investors focus on wealth creation.
With the ever-changing investment scenario and inflation, different people desire different goals. These goals can be achieved in various ways. Mutual funds are the basic requisite for building a goal-based corpus for financial security. It helps save money for retirement and other future goals, such as higher education, purchasing a house or car, marriage, vacation, etc.
What are tax saving mutual funds?
Investing in mutual funds has many benefits, but if investors make capital gains on the investments, they are liable to pay tax. The tax will depend upon whether they made a long term/short term capital gain.
One of India’s latest innovations is the tax saving mutual funds to expand the scope of investments in the capital market to include retail investors. Tax saving mutual funds, also known as ELSS (Equity-linked savings scheme), is a scheme launched to encourage small investors to save their money systematically towards long term financial security against retirement and other long term goals.
SEBI (Securities and Exchange Board of India) has laid out some guidelines for mutual funds to be called tax saving mutual funds. To be tax saving mutual funds, they need to be equity-oriented, meaning that they should have a minimum of 80% of their total investments in equity or equity-related instruments. They also have a lock-in period of 3 years, and they cannot be redeemed before the end of this period.
Investors can avail of a tax deduction of up to Rs. 1.5 lakhs per financial year by investing in ELSS, u/s 80C of the Income Tax Act. Under the tax saving category, there are two types of mutual fund options: dividend and growth. Dividend schemes allow investors to collect dividends from distributable surplus as they come. Growth schemes produce a long-term capital appreciation that can be redeemed at maturity, and there is no dividend payable.
ELSS schemes offer better tax advantages than other instruments u/s 80C such as Public Provident Fund(PPF), National Savings Certificate (NSC), Fixed Deposits, etc.
- Over the longer term, equities tend to outperform other asset class, say, a fixed-income investment option, such as PPF, NSC and bank fixed deposits. Higher returns are one of the many benefits of investing in ELSS compared to other tax saving instruments.
- ELSS funds are the best among other tax saving instruments as it offers investors the highest liquidity. It has a lock-in period of 3 years, whereas PPF has a lock-in period of 15 years, and NSC and fixed deposit have a lock-in period of 5 years.
Long-term goals such as children’s education fund, post-retirement corpus, children’s wedding, etc., can be achieved more easily with ELSS funds than other tax saving instruments.
How to plan and invest in top tax saving mutual funds?
Investing in tax saving mutual funds is a great way to save tax and invest for the future. These plans are a great addition to your portfolio, especially if you want to grow your money. Investors can invest in ELSS by investing a lump sum or by investing small amounts monthly (known as systematic investment plans or SIPs). Investors can invest in an ELSS fund through a mutual fund distributor, or they can choose to invest in an ELSS online with an asset management company (AMC).
To invest directly with an AMC, investors need to create an account with the AMC and fill out an application.
Investors can then complete their KYC online by submitting details like their PAN and Aadhaar number.
Once this is done, they can start investing in an ELSS fund. However, before they make a decision, there are many factors to consider. An ELSS fund is advised to be in sync with investors’ risk appetite and financial goals. If investors have long term goals, then investing in ELSS is one of the best options as it will provide both a potential to grow their wealth along with tax savings. It is essential that investors start investing early in mutual funds to achieve their goals, as the earlier they start investing, the better their returns will be.
By starting young and investing over a more extended period, investors will be able to take advantage of compounding, which will help generate better returns over the long term. Thus, it is advised that investors plan their goals well in advance and invest in ELSS to get the tax savings along with potential returns.
Mutual funds are an ideal investment solution for any investor. The Mutual Funds provide both diversification along with investment growth and professional management of corpus at a relatively low cost. However, individuals need to plan and invest wisely when they are considering investing in mutual funds. It is also necessary to be aware of tax implications and make sure they take full advantage of all the benefits these investments can provide.Tax benefits are an essential aspect to consider when investing. Though, one can also consider a variety of other factors as well to make a wise decision.
The majority investment of tax saving mutual funds is in equity, which has unpredictable returns. If it has done well in the past, there is no guarantee that it will do good in the future. This unpredictability makes them risky for risk-averse investors. Thus, investors are advised to consider their risk appetite, goals, age, and other factors before making an investment decision. RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.