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How does Mutual Fund Investment help In Saving Tax?

Updated on November 5, 2017

A mutual fund investment is usually run by an asset management company that unites a gathering of common people to invest their money in stocks, bonds, and other securities. If you are apparently the investor, then you can buy the mutual fund units, which are nothing but your share of holdings in a particular scheme. These units either are purchased or are redeemed according to the basic needs of the company. As an investor, you participate proportionally in both the gain and the loss of the company. One of the most important reasons for investing in mutual fund investments that it gives an access to diverse equities and bonds to small investors, which otherwise would be difficult for them to create with a small amount of capital.

Another major reason to invest in mutual fund investments that it helps you to save tax. Some of the ways in which mutual fund helps to save tax are:

  • A tax-saving investment should be a proper investment first and then a tax saver. Any individual having a taxable income should definitely invest in equity shares.
  • The best and safest way to invest in mutual funds in order to save tax is through monthly SIPs throughout the year. The limit for saving tax on any SIP is limited to 1.5 lakhs a year.
  • The two ways of saving in Equity Funds are:
  1. Growth scheme: Under this scheme, the investors, on the completion of three years, receive some bulky amount.
  2. Dividend scheme: Under this way of saving, investors keep getting regular dividends, even during the lock-in period, each time the fund declares a dividend.
  • If one compares the lock-in period of Public Provident Fund or National Savings Certificate, with that of mutual funds, the lock-in period for ELSS is much lower. PPFs are locked in for 15 years and NSCs are locked in for 6 years. On the other hand, ELSS has a lock-in period of only 3 years.
  • An ELSS Fund is basically investing in equity markets, and researchers prove that it can provide better returns in the long run when compared to other asset classes.
  • For people who are mere beginner investors, ELSS fund is an excellent gateway to enjoy the fruits of equity investing and mutual fund investment benefits.
  • ELSS funds generally tend to invest the larger portion of their fund in equity. This technique has a better capability to build up wealth over a long time.
  • If you are an investor looking for creating wealth, in the long run, ELSS funds are what you would need.

Investments up to an amount of 1.5 lakhs, earn tax rebate under Section 80 C, every year, in ELSS Funds. After the completion of the lock-in period of 3 years, the amount that reaches the pockets of the investor is also tax-free. This is the basic reason why investors are so attracted to saving in mutual funds. Anyone having an income which is taxable must look up to investing in mutual funds investment, in order to save their pockets from tax.

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