Tax Saving Mutual Funds| North Loop Official Blog
North Loop Logo
North Loop
07 Oct 2020

Tax Saving Mutual Funds

thumbnail for Tax Saving Mutual Funds
Credit: North Loop

What are tax-saving mutual funds?

Tax saving mutual fund also known as ELSS mutual fund (Equity Linked Savings Scheme) is a diversified category of a mutual fund with maximum exposure towards equity and equity-oriented securities and a part of the corpus in debt instruments. These funds primarily invest in stocks of companies in a specific proportion according to a fund’s overall investment objective and provide dual benefits of capital appreciation as well as tax savings.

How much tax can be saved on mutual funds?

If you are wondering how much tax can be saved on mutual funds, then you will be delighted to know that these tax deduction mutual funds provide a reduction in tax liability up to Rs.1.5 lakh per financial year. Along with the benefits of long-term capital appreciation and high returns, they are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.

Start investing for free with North Loop and get personalized recommendations

Benefits of investing in Tax saving mutual fund India –

Higher returns – ELSS mutual fund has the potential to generate higher returns as compared to other tax-saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), ULIPs and tax-saving bank fixed deposits. In the long term, ELSS mutual funds with primary investments in equity-oriented securities can beat other asset classes by a wide margin. Even though they can be volatile in the short-term, the long-run benefits far outweigh their volatility risks. Historically, ELSS funds are known to deliver average returns of around 12-15% when invested in for the long term (usually for more than five years).

Shortest Lock-in period – Tax saving mutual funds India have the lowest lock-in period of just three years as compared to all other tax saving investment options eligible for deduction under Section 80C. The NSC has a lock-in period of 5 years, PPF of 15 years and tax-saving fixed deposits have a lock-in period of 5 years. The low lock-in period allows these tax deduction mutual funds to offer the highest form of liquidity among all other options. It also reduces the redemption pressure for the fund managers during volatile markets. The fund managers get greater flexibility to take a more long-term view for other open-ended funds, especially while dealing with market volatility and get better positioned to take comprehensive bets due to the short lock-in period.

Options for investing in ELSS mutual funds –

Growth Option – In this option, the gains are received only at the time of redemption. That helps in appreciating the total NAV of the fund leading to higher profits. One thing to remember here is that, since the returns are subject to market risk, the desired returns may not always be the same.

Dividend Option – This is different from the growth option in the fact that it involves dividends that get declared whenever a fund house has excessive profits.

Dividend Reinvestments Option – Under this option, the dividends can get reinvested to add to the NAV. That is usually preferable when the market is going strong and is likely to continue in the same way.

How to evaluate the best ELSS mutual funds?

Fund returns – The performance of funds can get compared to ensure the returns are consistent over the past years.

Fund history – A fund’s performance gets reflected by the quality of stocks present in its portfolio and its benchmark. It is advisable to opt for fund houses that have performed consistently over a long period of say, five to ten years.

Expense ratio – An expense ratio represents all of the management fees and operating costs of the fund. Choosing a fund with a lower expense ratio is beneficial as it allows higher take-home returns. High expense ratios should get justified with extraordinary returns or some other benefits, especially for active funds as the management fees of most funds has undergone a considerable decline over the past decade.

Financial parameters – The performance of a fund can get analysed by a variety of parameters such as Standard Deviation, Sharpe Ratio etc. For example, a fund with a higher standard deviation and Beta would be riskier than one having lower values. Funds with a higher Sharpe ratio should also get considered as they offer higher returns for the additional risks taken.

Conclusion –

The starting point for all kinds of investing is to figure out the investment objective, risk profile and investment horizon. For investing in ELSS mutual funds, a comparison can be made based on their risk-adjusted returns. You can invest in mutual funds on a digital banking and investment platform like North Loop and also take the help of professional mutual fund advisors.

To sign up on North Loop, click here.

Save money with

No-fee banking, investments, remittances & insurance for the global Indian

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.