Tax saving mutual funds can be defined as any mutual fund that may earn a tax saving and is able to offer an attractive rate of return. With this in mind investors who invest in tax-saving mutual funds have a distinct advantage over others. Mutual funds are basically stock funds, which are managed by professional investors. These investors use their knowledge and expertise to invest in shares of various companies at a time when they are ready to make an injection of cash into the market. By investing in these mutual funds, you will find yourself with a tax saving which is not available to most people. If you invest in regular stocks you are most likely to suffer a tax loss on most of your investment.
The major advantage of tax saving mutual funds is that they do not come with a lock-in period. The investment does not come with a definite date for a distribution. Your money grows along with the fund, without having to wait for a specified date to see an increase in your capital. Most investors have reported that there is usually significant growth in their account during the first year of fund management and afterwards.
There are several other advantages of tax saving mutual funds apart from the immediate tax saving and the lack of lock-in period. Investors make use of such funds to diversify their portfolios and lower their overall risk level. Some common tax saving schemes include the elss and asset value appreciation policies. With the inclusion of these policies, the investments made by the investors remain tax free throughout the tenure for which they are invested in.
Another common tax saving mutual funds scheme is the equity-linked savings scheme. With this scheme, the investor makes contributions in his or her own tax saving account to be invested by the mutual fund provider. When the period for distribution is over, then the distributions are done in the form of dividends paid by the mutual fund provider. The equity-linked savings scheme and the elss are very similar to each other in terms of their tax treatment.
Tax saving schemes are also available in the form of the lock-in period and the minimum drawdown provisions. With the lock-in period, a specific percentage of the total amount invested is locked for a pre-determined period such as six months or one year. With the minimum drawdown provision, the discount at maturity is less than the minimum expected value. Both the class and the equity-linked saving schemes allow the investor to benefit from the tax-saving benefits offered by the plan irrespective of the time of distribution. This ensures that the investor remains committed to the scheme even after the end of its run.
It is important that the investor does not invest more money than what is absolutely necessary to see the best results. The mutual fund’s manager must work within the specified budget set by the investor. Otherwise, the results can go south all too quickly. It is advisable that the fund manager gives a detailed monthly report to the investor, outlining the status of his / her investments. This should contain details like the amount of dividends earned, the net gains, the rate of appreciation of the capital and the net loss, among others.