Advantages of Tax Saving Mutual Funds

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Advantages of Tax Saving Mutual Funds

While the traditional options have their own advantages, tax-saving funds score over other options on various counts. Before we move to the advantages, what exactly are these funds? They are simply diversified equity funds that invest in stock markets and additionally provide a tax deduction on the principal amount you invest, in the year of investment. That means they are not different from an equity fund in terms of their investing objective or strategies.

Here's how this class of tax-saving instrument scores over the other options:

 Tax-saving funds have the shortest lock-in period (three years), when compared with other options. That means post the three years, while you can stay invested, you will have the leeway to take out the money if you need to.

 Tax-saving funds, being linked to equity markets, have proven to be superior investment options over the long term in terms of returns too. These funds have, on an average, delivered 25% annualized returns in the last three years (as of December 15, 2014). Of course, while they are also subject to market vagaries, over the long term their returns have proven to be far superior to traditional options such as PPF or NSC.

Unlike other tax-saving options where the interest income is entirely taxable, tax-saving funds  being equity funds enjoy tax exemption on the long-term capital gains. That means with a three-year lock in, your entire gain is tax-free.

Besides the above advantages, tax-saving funds, like any other mutual fund, is highly transparent with daily NAV declaration , monthly portfolio and fact sheets and so on. Thus, you can always keep an eye on your investment.

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