Common misconceptions about tax saver mutual funds debunked

People in our country are always on a hunt to save taxes. This leads them to invest in the best mutual funds, which helps them save taxes up to Rs 1.5 lakh. 

When it comes to tax saving funds such as Equity Linked Savings Schemes, it is primarily to save on taxes and potentially earn higher returns on their investments. 

What are mutual funds?

It is a type of investment vehicle in India that aggregate money from multiple investors and utilize it to invest in a diversified portfolio of securities. These securities are usually stocks, bonds etc. Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors. 

It is pertinent to mention here that this industry is regulated by SEBI (Securities and Exchange Board of India), and various types of mutual funds are available, each with its unique investment strategy and risk profile. 

Potential investors can easily buy mutual funds from their smartphones by downloading the right application. With just a few taps, one is more than good to go. From diversification to professional management to liquidity, this investment instrument has a lot to offer. 

What are tax saver mutual funds? 

Also known as Equity-Linked Savings Scheme (ELSS) funds, these are a type of mutual fund in India that offer tax benefits to investors. ELSS funds invest primarily in equities and equity-related instruments and have a three-year lock-in period. 

The investors mostly plan to avail this investment scheme in order to claim a deduction of up to Rs 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961, for the amount invested in ELSS funds. This means the amount invested in ELSS funds is deducted from the investor’s taxable income. 

Before investing in ELSS funds, the investors should carefully evaluate their investment goals as well as risk appetite. 

What are the common misconceptions about the tax saver mutual funds?

  1. Risky

Many potential investors believe that ELSS funds are very risky in nature. However, the reality is that these funds invest primarily in equities, which do carry higher risks than traditional fixed-income instruments. But, the investors can easily mitigate the risk by investing in well-diversified ELSS funds with a long-term investment horizon. 

  1. Require a large investment

Another big misconception is that these require a significant investment. However, few know that they have a minimum investment amount of as low as Rs 500, making them accessible to small investors. 

  1. 5-year lock-in period

Some investors think that the lock-in period for ELSS funds is five years. However, the fact is that it has a lock-in period of three years, which is the shortest among all tax-saving instruments. 

  1. Purpose is only tax-saving

One should not think about this investment as only for tax saving. It is also part of the overall investment portfolio due to its exposure to equities, which can provide higher returns in the long run. 

  1. Cannot be redeemed before the lock-in period

Who said that the best tax saver mutual funds cannot be redeemed before the completion of the lock-in period? You, as an investor, can easily redeem ELSS funds after the completion of the lock-in period. However, early withdrawal may attract exit loads, which vary from fund to fund.