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It might be difficult watch your hard earned savings simply getting deducted in taxes. The simplest thing to do would be to invest in a tax saving mutual fund, which helps you build wealth and reduce your tax liability. Remember though tax planning is challenging, it can also be rewarding if done correctly. So, we are giving you a quick run through about how you can save your hard earned money by investing in a Tax Saving (ELSS) mutual fund scheme.

An ELSS (Equity Linked Saving Scheme) could become you best choice if you are looking for:

Tax benefit u/s section 80C of the Income Tax Act, 1961
Opportunity to invest in the equity markets to grow your investment corpus
Long term Capital appreciation
Shortest lock-in period as compared to other tax saving instruments under Section 80C

As per SEBI’s categorization norms for mutual funds, ELSS is an open-ended equity-oriented mutual fund scheme that invests a minimum 80% of its assets in equity & equity related instruments.

Generally investment objective of an ELSS tax saving mutual funds is to achieve long-term capital appreciation by investing primarily in equity and equity-related instruments.

A distinctive feature about ELSS is that compared to the other open-ended diversified equity mutual funds, investment in ELSS is subject to a compulsory lock-in period of three years. During this period, you cannot redeem your investments before the completion of three years from the date of the investment. After the lock-in, if you decide to redeem the investment on the realized gain, as per the current tax rules, LTCG (Long-term capital gains) tax applies.

Remember, though tax saving may be a major purpose behind investment in tax saving mutual fund; it’s a general expectation that any investment should also deliver some return. Hence, while evaluating your options for the tax saving mutual funds of 2021 to invest in, you need to look at the return column too. Do not forget that as an investor, should know the risk- reward tradeoff specific to an investment before taking the plunge with your hard earning money. You need to look beyond to see a historical growth of ELSS tax saving mutual funds for a period of at least 3 years.

If you are looking to save tax, lower your capital gains tax and long term risk adjusted returns from your investments, maybe you should consider adding an ELSS tax saving mutual fund to your portfolio.

Open-Ended Mutual Funds:

Open ended mutual funds are mutual funds where your investments are not subjected to any lock-in. They are liquid and can be redeemed any time. They may be subjected to an exit load depending on which category they belong to. These types of mutual funds may or may not be listed on the exchange. They are more popular among the investors as compared to closed ended mutual funds.

Closed-ended Mutual Fund:

As the name suggests, closed-ended mutual funds are funds that are subjected to a lock-in period or a fixed maturity period.. Closed-ended funds can be bought or sold real-time just like any additional stock on an exchange. However, one key difference between closed-ended mutual fund vs. open-ended mutual fund is that in Closed-ended Fund once you invest, you cannot redeem your money back unless the lock-in period is over.. The lock-in negates the possibility of an impulsive decision during times of unstable market conditions. A steady AUM helps fund managers to take prudent investment decisions. Closed-ended mutual fundsare mandatorily required to be listed on the exchange but you can invest without a DEMAT account too.

Investors with a long-term investment horizon who do not need the invested money during that horizon can look at investing in closed-ended funds.

ETFs:

Exchange-traded funds are investment vehicles that invest in a basket of securities. These funds are open-ended. You can buy and sell them on the markets just like stocks. They are not available over-the-counter which means you will need a DEMAT account to invest in them. ETFs mirror or replicate the performance of a particular index.

ETFs are managed passively & actively. ETFs generally have lower expense ratios than those charged by actively managed funds.

Investing in more than one ETF could lead to duplication or over-diversification. An ETF tracking the NIFTY 50 and an ETF that tracks technology or IT companies may have many overlaps if the underlying stocks are common.