Mutual Fund Role in Tax Saving
There has been a tremendous rise in the popularity of mutual fund investments. The major reason behind this is the better returns offered by this investment tool, as compared to fixed deposits and other traditional tools of investment.
Mutual fund investment enables investors to put money in various financial options with the help of advice from investment managers. To obtain a balance, mutual funds collect money from several investors and put these sums in debt securities and equity instruments. There are different types of options such as open, close-end, speciality funds or combining all of these.
The risk and return ratio is well balanced in this investment option where:
- High risk investment will yield higher returns
- Medium risk investments will provide medium gains
- Low risk investment will provide lower earnings
Investing in mutual fund and earning returns is indeed attractive. However, what about the tax applicable on the income? Well, there is the ultimate mutual fund with tax benefits!
The tax saving mutual funds comes with an added benefit of tax saving, under section 80C of the Income Tax Act of 1961. Most of these funds are equity linked saving schemes (ELSS) which invests your funds in growth-oriented equity markets. There is a dividend scheme and growth scheme under tax saving mutual funds. The dividend scheme enables the investors to gain extra income in the form of the dividend, which is not subject to tax and can be withdrawn or reinvested in the fund, thus becoming eligible for tax benefits. The growth scheme focuses on generating a long-term appreciation of the capital, redeemable at the end of the maturity period of the scheme invested in.
Let us explore some of the features and benefits of this tax saving instrument, which makes for a profitable investment option for the investors.
- You can start investing with as low as Rs. 500.
- The upper limit for investment is not defined. However, investments valuing upto Rs. 1,50,000 only will be eligible for tax benefit.
- The plans allow the investors to invest in the funds on a monthly basis via the systematic investment plan (SIP), against the traditional method of investing the whole block of funds in one go.
- The lock-in period is 3 years, unlike other investment instruments, which come with a lock-in period of 6 to 15 years.
- Investments can be made all the year- round, considering the open-ended nature of schemes.
- The schemes are prone to market risks ranging high, medium and low.
- The funds are invested in various places and are kept diverse, so that the risk of loss is minimized.
- One can also make investments in these schemes to plan for future expenses like a down payment for a house or a car etc.
- Nomination facilities are available to the subscribers of these mutual funds.
Mutual funds are a popular instrument of investments, coupled with a plethora of benefits and most importantly, the tax benefits.