Five Winning Tips to Help you Pick the Best Tax-Saving Mutual Funds

Posted by Atish Nayar on October 29th, 2018

There’s no arguing this universal fact - Every taxpayer wants to save tax. And, indeed there are multiple ways in which one can save tax.

Of these, equity-linked saving schemes (ELSS) are one of the most promising ways to cut down your tax burdens, while helping you grow your portfolio.

First things first,

What is ELSS and how does it help to Save Tax?

ELSS is a type of mutual fund. It’s a diversified mutual fund plan where a major chunk of your investments are deposited in equities and equity-related securities. ELSS offers you two major benefits. One – Save Tax; Two – Generate higher returns.

When you invest in ELSS plans, you are eligible for tax deduction up to 1.5 lakhs per financial year, under the Section 80C of the ITA (Income Tax Act of 1961).

With that said, not all ELSS funds are created equal.

Here, you can find tips from Expert Investors to Guide you while choosing the best Tax-Saving Funds:

#1: The Early Bird Gets the Worm

Many investors make the mistake of searching for a tax-saving fund, only at the end of the financial year. This is a costly mistake, as you’re bound to skip diligent research when you’re hard pressed for time.

Remember that all ELSSs come with a lock-in period of three years. So, if you make a hasty decision, there’s no way you can reverse that.

Instead of waiting for tax season to roll around, make it a point to start early. By investing in a tax saving fund via a SIP or STP, you maximise your returns.

#2: Don’t Judge Based on Short-Term Returns

This one holds true for all mutual fund schemes and not just ELSS. Don’t judge a fund’s performance based on short-term returns, like the last six-month or one-year performance.

Look for ELSS plans that are consistent performers, say over the last five years or more.

#3: Don’t Quit at the End of the Lock-in Period

This is another huge mistake that even seasoned investors make. When you invest in an ELSS, your funds are locked for three years. A vast majority of investors pull out their funds at the end of three years, irrespective of the performance of the fund or their financial requirements.

If you aren’t in need of immediate finances, then continue to stay invested, even after the lock-in period is over. Remember that ELSS is an equity-linked plan, and you need to stay invested for at least five to seven years to see significant returns.

#4: ELSS is more than Tax-Saving

While it’s true that ELSS funds are popular because of the tax-saving benefit, remember that it’s essentially an equity-based mutual fund. So, you’ll have to compare and evaluate funds based on several criteria like your risk appetite, financial goals and more, to help you choose the best tax-saving fund.

#5: Don’t Switch every Three Years

Another mistake made by seasoned investors is that they keep on moving to new tax saving mutual funds once every three years. They get tempted by the huge, short-term returns offered by another fund.

IT is not advised to pull out your investment just because your fund is not performing well. Consider other factors like market situation, size of the fund, and make a move only if your chosen fund is performing badly consistently.

Choose the Right ELSS to Maximize Returns

While choosing an ELSS plan, make sure you focus on both aspects – tax saving as well as maximising returns. Use these tips to pick a winning ELSS and get closer to your financial dreams!

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Atish Nayar

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Atish Nayar
Joined: August 2nd, 2017
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