What is a tax saver mutual fund? How does it work?
Investors always look for better investment opportunities to get regular returns. It helps them save taxes and create long-term wealth. While there are many investment options generating profits, they come under taxation according to income tax laws.
But, an investor can also save income tax by investing in a tax saver mutual fund. This article will explain what a tax saver mutual fund is and what are the numerous aspects that can help you make a good decision for investment.
Let’s understand the tax saver mutual fund?
Tax saver mutual funds are just like any other mutual fund scheme. But, diving further into the concept of tax saver MFs, let’s understand mutual funds.
A mutual fund is an investment fund that is professionally managed. It takes money from various investors to buy securities. It is generally used in India, Canada, and the United States. You can consider a mutual fund as a trust that takes money from many investors sharing a common investment objective.
Now let us again come to tax saver mutual funds.
A tax saver mutual fund helps investors save taxes. This initiative qualifies for a deduction of tax of up to rupees 1.5 lakh. Through these mutual funds, one invests in growth-oriented equity markets. It helps the investors to get good returns and build long-term wealth.
Let’s understand this with an example. If you want to invest rupees 60,000 in a tax-saving mutual fund, this amount will be eliminated from your entire taxable income. It will reduce your tax burden.
How does a tax saver mutual fund work?
Tax saver mutual funds collect money from many investors. They invest the money in the equity market. The equity market is the stock market or the share market that is a combination of cells and buyers of stocks. They may also include the securities that are listed on public stocks.
A tax saver mutual fund includes a lock-in period of 3 years. It means that you cannot withdraw your money for 3 years. When you want to invest in mutual funds through the systematic investment planning route, the lock-in period for every installment remains to be 3 years.
When you are redeeming the units of a mutual fund, you can just get the units that have finished the period of lock-in. You can also redeem them at the present net asset value. Net asset value refers to the value of the fund of the investment without its liabilities. It is further divided by the shares outstanding.
You can invest some random amount or choose options for regular installments through systematic investment planning (SIP). When you invest with the help of installments, your installment is going to mature post 3 years from the date you have made it.
It indicates that your last installment will be kept for 3 years from the date of investment, which is different from the first installment’s maturity date.
The tax saver mutual fund is the best option if you want to save tax. It offers many advantages because it comes with the unique feature of tax exemption. If you want to invest in a tax-saving mutual fund scheme, you need to learn and research the involved risks with every scheme.
You need to know that you do not have any kind of upper limit on the investment tenure, so you can continue giving your investment in the scheme if it seems to be profitable for you.
Who should invest in Tax saving funds?
Tax-saving funds come with lots of good features and have been proven to give remarkable returns, but they may not be perfect for everyone. Here’s who can invest:
- If you are young and are paying taxes, you can make the most out of the dual benefit of investing in a tax-saving mutual fund.
- Older people need to consider other investment options that come with no or lower capital risk.
- Investments need to possess a flexible long-term horizon for reaching the best benefits or assuring better returns. So, it is recommended to invest for a duration of approximately 6 to 7 years for getting long-term advantages.
- Investors also analyze the track record of their fund after considering their investment based on the risk appetite and financial goals. So, it is ideal for young investors who can remain invested and take the best benefits.
- Which SIP is good for tax savings?
ELSS is the best SIP for good tax savings.
- Can mutual funds be used for tax savings?
Yes, a tax saver mutual fund can be used for saving tax to a great extent in the long run.
- Which is better, SIP or ELSS?
If you want to invest at the end of a financial year, then a tax saver mutual fund will be the best option. But, if you want to have a constant source of income then SIPs are the best option.