All about Tax Saving Mutual Funds

Tax saving mutual funds is just like other mutual funds with a bonus point that investments are eligible for tax benefits under section 80C. Many of the tax saving mutual funds are ELSS schemes and investments are made in equity markets.

How does Tax Saving Mutual Fund Work?

When investors invest their money in mutual funds, those funds are added to the pool. The funds are then invested in the equity markets in a way that even if one investment faces losses, the other investment manages to compensate the loss.

ELSS schemes may come with a lock-in period of 3 years, which doesn’t permit the investment to be withdrawn until the end of that time. If the investment is made in monthly instalments (SIP) then the lock-in period for each instalment is 3 years.

When it is time to withdraw, investors will be able to see how many units have been unlocked and redeem them at the current NAV. The NAV (Net Asset Value) is the amount one will get for each unit. To be able to make withdrawals, one will have to know the number of available units and submit a claim form to the mutual fund provider. They will credit the amount to the individual’s account as soon as it is processed.

Features of Tax Saving Mutual Funds

If one can’t afford to put in large amounts to invest, then investing in ELSS can begin with Rs. 500 but it has no upper limit, unlike PPF & NSC. However there is no upper limit, only investments worth of Rs. 100,000 will be eligible for tax benefits. Investments made in tax saving mutual funds have lock in periods of 3 years. These mutual fund investments come with a risk factor which can either be low, medium or high on the basis of where the funds are invested. Generally, tax saving mutual funds are ELSS’ (Equity Linked Savings Schemes) and open ended. These mutual funds offer nomination facilities as well. Many ELSS schemes feature entry and exit loads. These fees are paid to the mutual fund providers.