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A Guide To Tax Saving Mutual Funds

The SEBI (Securities & Exchange Board India) says that taxes levied on a person’s annual income are exempted if he/she makes an investment in tax saving mutual funds. But should tax saving be the only criteria for deciding the mutual fund one should invest in? And how viable it is to rely on such funds for good returns? Let’s find out.

Investment Should Be Goal Oriented Not Just For Tax Saving

There is no doubt that if you are an investor and if you have invested in any kind of tax saving mutual fund you will get some rebate at the end of year. But don’t make it a sole criteria for deciding the mutual fund you want to invest into. Many a times, the funds that provide tax saving benefits have the most volatile and fluctuating stock value. So there are chances that on one hand you may save some tax but on the other side you may lose large amount of money. So try to treat tax saving feature as one of the add-on benefit along with other benefits associated with your mutual fund.

Check Performance History Of Funds Before Investing

Second most important factor is to check the performance history of the fund that you are planning to invest in. Check out the last five years performance of the fund, see if it has performed consistently along bearish and bullish phases of market. Going for the funds that have performed uniformly during all phases of market will ensure you good returns on NAVs (Net Asset Value) of the fund along
with tax benefits.

Tax saving mutual funds

Invest According To Your Risk Appetite

The next point that you must consider is the approach that your fund managers have towards investment. Usually, funds are managed either by strong systems or by potent individualistic instinct that gives the fund manager complete liberty to take investment decisions. The former one is a more reliable option as that system allows the investment team take rational decisions based on a logical
process that is known to the investor too. It keeps the investor aware of the amount of risk he/she is taking and leaves no room for unpleasant surprises. Also it is advisable that if you are not a risk oriented person better keep equity funds at bay.

Check Expense Ratio Before Investing

One last but not the least point that you should check is the expense ratio. There is part of money that you have invested in tax saving mutual fund, used for paying fund manager’s salary, marketing costs, advertising expenses, and other administration costs. You must know how much of your amount is actually being processed and how much is used for maintenance purposes. On regular basis,
the ratio varies from 2.25 – 2.50 %. A lower expense ratio will have more positive impact on your returns.

Some highly recommended Tax Saving Mutual Funds in India are:

SBI Mutual Funds
Prudential ICICI
Bajaj Capital
Standard Chartered Mutual Fund India
Franklin Templeton Fund India

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About the Author: Praveen Unnikrishnan

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