All You Need to Know About the Best Tax Saving Mutual Funds
Mutual funds have become a popular investment option, especially with the sustained advertising campaigns from the Association of Mutual Funds of India (AMFI). These advertisements have increased awareness about mutual funds, including that they bring in higher returns than Fixed Deposits (FDs) while still being almost as safe an investment option.
You see, mutual funds pool money from different investors and use that to build a balanced investment portfolio that would comprise both debt securities and equity instruments. The portfolio varies from fund to fund, and professionals manage your investment. The funds offer open and close-ended schemes, speciality funds, or a combination.
As an investor, you must decide on your investment objective and choose your risk appetite. A high-risk scheme will probably offer higher returns, while a medium-risk scheme provides medium returns, and a low-risk scheme offers low returns. The fund you choose should be able to help you meet your investment objectives.
Additionally, while making money through mutual fund investments is attractive, income usually means you will have to pay taxes. However, there is a way around this: invest in tax saving mutual funds.
What Are Tax Saving Mutual Funds?
Tax saving mutual funds are mutual funds with a tax saving benefit. Investments into tax saving mutual funds are eligible for tax benefits of up to INR 1,50,000 under Section 80C of the Income Tax Act of 1961.
Additionally, most of the top tax saving mutual funds are equity-linked savings schemes, also called ELSS, and often have a three-year lock-in period. Moreover, ELSS funds have to invest at least 80% of their corpus in equity or equity-related instruments as per the guidelines laid out by the Securities and Exchange Board of India or SEBI.
There are two types of ELSS funds:
- Dividend Schemes: These allow investors to receive some extra income in the form of dividends from the fund based on the availability of a distributable surplus. These dividends are tax-free and can be withdrawn or reinvested in the fund, also tax-free.
- Growth Schemes: These generate long-term capital appreciation for investors, which can be redeemed at the end of the maturity period, tax-free.
How Do Tax Saving Mutual Funds Work?
Like all mutual funds, the best tax saving mutual funds pool money and invest it into the equity market in a balanced way. This ensures that if one investment incurs losses, another will compensate for it. For example, a mutual fund investment breakup may be as follows:
| Investment Asset Industry | Percentage of Corpus Invested |
| Automotive Industry | 6.56% |
| Banks | 17.56% |
| Consumer Durables | 5.43% |
| Consumer Non-Durables | 5.66% |
| Power | 5.92% |
| Software | 8.93% |
| Pharmaceuticals | 9.99% |
Additionally, ELSS funds come with a 3-year lock-in period, meaning you will not be able to withdraw from the fund until after three years after you have invested. If you choose to invest in the scheme through a SIP, each SIP investment will be unlocked only after a full three years.
Thus, if you invested the first instalment of the SIP on Jan 1st, 2020, and the second instalment on Feb 1st, 2020, then the investment of Jan 1st, 2020 will be unlocked on Jan 1st, 2023, while the investment of Feb 1st, 2020 will remain locked until Feb 1st, 2023.
Moreover, as an investor, you will only be able to redeem unlocked units of the fund at the current NAV price. The NAV or Net Asset Value is the amount you can redeem for each unit of the mutual fund. To make a claim, you will need to know the number of units under the scheme and submit a claim form to the mutual fund provider, who will process the claim and send you the money.
Features Of Tax Saving Mutual Funds
The following are some features of equity-linked savings schemes (ELSS) that make them an extremely affordable and attractive investment option:
- Tax saving mutual funds come with a lock-in period of three years.
- ELSS funds are still mutual funds and are subject to market risks, which could be high, medium, or low, based on where the funds are invested.
- Tax saving mutual funds, especially ELSS funds, are usually open-ended.
- These funds also offer nomination facilities to subscribers.
- ELSS funds come with entry and exit loads, meaning the mutual fund providers charge the investor a certain amount as fees on the purchase, sale, redemption, or transfer of these funds.
Benefits Of Tax Saving Mutual Funds
There are many benefits to investing in tax saving mutual funds like ELSS schemes, including:
- Investments in such schemes are eligible for tax benefits of up to INR 1,50,000.
- The long-term capital gain from these schemes is also not taxable.
- Such schemes create a corpus for future uses like a child's education, buying a car or a house, etc.
- Investors can make investments through a systematic investment plan (SIP) or pay the money as a lump sum.
- The portfolios of such schemes are kept diverse to minimize losses due to market volatility.
- You can choose to withdraw dividends earned, even during the lock-in period.
- ELSS funds have the shortest lock-in periods of all types of mutual funds. The lock-in period for ELSS funds is only 3 years, while for other funds, it usually ranges from 6-15 years.
- Since the schemes are open-ended, investments can be made at any time of the year.
- The funds are managed by professional fund managers with an in-depth knowledge of how the market works. Thus, first-time investors can also easily invest in these funds.
Tax Saving Mutual Funds/ ELSS Vs. PPF Vs. FD
| Particulars | ELSS | PPF | FD |
| Investment Eligibility | Any individual taxpayer, including NRIs | Resident Indian individuals | Any individual taxpayer, including NRIs and HUF |
| Investment Amount | INR 500 up to no limit | INR 500 up to INR 1.5 lakhs | INR 100 up to INR 1.5 lakhs |
| Lock-in Period | 3 years | 15 years | 5 years |
| Tax On Returns | Tax-free | Tax-free | Taxable |
| Expected Returns | 10% to 15% (market-related) | No returns | No returns |
| Investment Option | Medium to long-term | Long-term | Medium to long-term |
| Loan Facility | Partial loan available after first 3 years | Loan available after first 3 years | No loan available |
| Risk Factor | Risk associated | No risk | No risk |
| Tax Saving Benefit | INR 1.5 lakhs under Section 80C of the Income Tax Act 1961 | INR 1.5 lakhs under Section 80C of the Income Tax Act 1961 | INR 1.5 lakhs under Section 80C of the Income Tax Act 1961 |
Top 10 Tax Saving Mutual Funds In India
There are many tax saving mutual fund options in India, and various platforms offer various tax-saver schemes. Be sure to research before choosing the best tax saving mutual fund for your requirements.
The following table compiles the top 10 tax saving mutual funds to make things easier for you. These are the best tax saving mutual funds in 2022:
| Funds | 1-year Returns (%) | 3-year Returns (%) | 5-year Returns (%) |
| Quant Tax Plan Direct-Growth | 20.27 | 45.27 | 33.1 |
| Canara Robeco Equity Tax Saver Fund | 8.98 | 24.31 | 20.4 |
| Tata India Tax Savings Fund Growth | 14.6 | 22.07 | 17.05 |
| L&T Tax Advantage Fund Growth | 16.2 | 13 | 20.3 |
| Aditya Birla Sun Life Tax Relief 96 Fund Growth | 19.3 | 12.1 | 23.5 |
| Aditya Birla Sun Life Tax Plan-Growth | 18.9 | 11.6 | 22.6 |
| DSP BlackRock Tax Saver Fund Growth | 9 | 11.4 | 21 |
| Axis Long-term Equity Fund Growth | 18.1 | 9.3 | 24 |
| Kotak Tax Saver Fund Growth | -4.79 | 10.25 | 17.66 |
| Invesco India Tax Plan Fund Growth | 0.6 | 11.1 | 19.0 |
Another list portrays the following mutual fund schemes as the top 5 tax saving mutual funds to invest in for 2022:
- Quant Tax Plan Direct-Growth
- BOI AXA Tax Advantage Direct-Growth
- Mirae Asset Tax Saver Fund Direct-Growth
- IDFC Tax Advantage (ELSS) Direct Plan-Growth
- Canara Robeco Equity Tax Saver Direct Growth
Thus, the top tax saving mutual fund for 2022 is the Quant Tax Plan Direct-Growth.
Conclusion
To conclude, there are many tax saving mutual funds out there, the most popular of which are equity-linked savings schemes (ELSS).
ELSS schemes come with short lock-in periods and a varied portfolio, which make them attractive investment options. Apart from this, investors can invest in ELSS schemes to create a corpus for later uses like buying a car or a home, paying for a child's education, etc.
Lastly, investors must be clear on investment goals and research before deciding which tax-saver schemes to invest in.
Frequently Asked Questions
How do I pay for my mutual funds?
You can pay for your mutual funds through cheques or direct debits. In the case of a SIP, direct debits would be easier because you can set them to be automatically transferred.
Which is the top tax-saving mutual fund for 2022?
The Quant Tax Plan Direct-Growth is the top tax-saving mutual fund for 2022.
Is there a minimum investment for ELSS funds?
Yes, most mutual fund providers have a minimum investment of INR 5000 for ELSS funds, though the amount varies from fund to fund.
What is the maximum amount that can be invested in ELSS funds?
There is no maximum limit to the money you can invest in ELSS funds. Additionally, since ELSS funds are usually open-ended, you can invest at any time of the year.
What is the NAV of a fund, and how is it calculated?
NAV stands for Net Asset Value, which is the cost of each mutual fund unit. Thus, it is the amount you would get for selling one unit of a fund or the amount you would have to pay to buy one unit of a fund. The formula to calculate the NAV of a mutual fund is as follows:
(Value of all securities held + value of all receivables - the value of all payables) / Number of units.