A Beginner’s guide to tax saving mutual funds

Mutual funds can be considered as a reliable financial instrument, that can help in channelizing the wealth appreciation goal of an individual. Beginners who are exposed to the market for the first time need some tips while picking up the appropriate mutual fund. Financial planning should also entail some tax saving along with wealth enhancement. ELSS mutual funds is a suitable choice as it comes with the tax benefit under section 80C of Income Tax Act, 1961. Further, these funds are mostly open-ended equity, which means that investors can invest in the fund any time according to his preference. The brief guide for beginners is given below.

Basics of ELSS mutual funds

ELSS mutual funds offer a diversified program, which is not available in other equity-based mutual funds. As mentioned before, this fund allows tax benefits up to INR 1,50,000 under section 80C of the Income Tax Act. These have a fixed lock-in period of 3 years, with higher returns potential compared to other conventional tax-efficient schemes like PPF and NSC. PPF has a lock-in period of 15 years and NSC has a lock-in period of 6 years. Both have a longer lock-in period, and the returns generated are relatively low. Besides, ELSS like any other mutual funds have a better potential for fund growth. The investors can also opt to stay invested after 3 years, and there is no additional lock-in period.

Efficient Fund Management

Mutual funds are the high-risk financial instruments for investment. However, when an investor selects the appropriate funds, it reaps much higher returns than any other tax saving scheme like NSC, PPF, and FD. The returns can be expected as professional fund managers operate the funds. With the exposure to market dynamics and long-term experience, these fund managers work towards the growth of your fund. In other words, ELSS mutuals funds allow fund expansion with tax relief within a short span of time.

Steps to start your ELSS mutual funds: Direct Vs. Regular

The ELSS scheme is a mutual fund scheme. The newbie’s investing in a mutual fund must be aware of the fact that investments are offered through two channels. A regular plan, where the investors make the investments through distributors. A direct plan, where the investments are made by the investors directly by AMC or through an investment advisor. Both the routes are different in terms of the price.

An expense ratio is charged as a commission of the distributor. The distributor can be an investment broker or bank. All formalities related to the paperwork are completed by the distributor on behalf of investors. The process is simplified, and the distributors assist in the ideas of investment. The investors who feel difficult to comprehend the mutual fund’s tool can take this route.

The direct plan is devoid of all such cost, and thus investors get higher returns. Once you have decided which plan is suitable, you can register from the list of nearby AMC office. When dealing with funds of different houses, one can also create an account in the shared platform of mutual fund utilities. A Common Account Number (CAN) helps carry all the transactions of mutual funds. Furthermore, guidance can be taken from investment advisers and Robo advisers. The latter one is an online-based financial planning solution without any human intervention. The direct plan is suggested to the ones who are tech-savvy and have a basic financial awareness related to the mutual funds.

Take baby steps through SIP

While making an investment in ELSS mutual fund, investors should not prefer to invest the Lumpsum funds at one go. Mostly, it is done by investing in the last quarter of the financial year. This reflects poor sub-optimal tax planning. Additionally, it exposes to the volatile market risks that tend to attract negative returns. A staggering investment approach is preferable when dealing with risk orientated mutual funds. This can be done through lumpsum investment in another debt mutual fund, where the money is transferred every month in an ELSS scheme. However, experts recommend taking baby steps through Systematic Investment Planning (SIP). The small contribution in installments will help in compounding the wealth over a period, and also facilitate a better rupee cost averaging. The SIP amount can start with a minimum of INR 500.

How to select a star fund?

There is no shortfall of choice when it comes to picking an ELSS scheme. The past performance becomes a significant indicator that throws light on where to proceed. Apart from the best performance in a particular year, check for consistency in performance. Besides, the XIRR in mutual funds helps in calculating the internal rate of return. All these can give an idea of fund selection.

Reap ELSS benefits: Growth Vs. Dividend

The benefits in an ELSS scheme can be reaped in two ways Growth and Dividend. Growth options allow investors to enjoy the benefits of long-term wealth creation. The accumulated fund will be received after the end of the lock-in period. In the Dividend option, the investors receive a tax-free dividends payouts. This ensures a regular income to the investors. However, there is a dividend reinvestment option in which the sum is further reinvested in new investments.

The roadmap to the ELSS mutual funds requires a longer time to perform. Risks must be assessed before investment, and it will be prudent to go with a combination that doesn’t have multiple schemes that drag the fund performance.

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