Save tax with mutual funds

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Tax Saving Mutual Funds are highly preferred by the investors as they can enjoy the benefits of Section 88 (of the Income Tax Act). There are a range of parameters which should be followed by the investors who wish to invest in the tax saving mutual fund to ensure returns over a long period.

A Short Note on Tax Saving Mutual Funds in India-

Tax Saving Mutual Funds are one of the most preferred areas for investments. This is mainly because the investors treat the tax saving funds at par with the regular diversified equity funds.

They would just follow the same process while choosing a tax saving fund just as they would have done in case of equity fund. A proper study on the performance of the tax saving mutual fund for at least a period of three years or five years is essential for every investor to avoid unnecessary hassles that might pop up later on. The lock-in period for the fund is determined by the fund manager so that the investors cannot sell the stocks anytime they want as selling of stocks at wrong time, especially when the value of stocks lower down is quite inexpedient for the company.

Ways To Select a Tax Saving Mutual Fund

Performance of a Tax Saving Mutual Fund:

The investors are advised to assess the tax saving mutual fund on the returns of its Net Asset Value before going for a purchase. A tax saving mutual fund is determined on the basis of its performance on the Nifty, Sensex and BSE 200. To evaluate the performance of a tax saving mutual fund, it is essential to invest in it for three or five consecutive years.

Investment Approach:

It is also very important for the investors to have a profound knowledge about the investment approach of the fund manager of the tax saving mutual fund. The investment patterns are either managed through strong systems or individually of which the first one is more relevant though the fund managers enjoy the full privilege to make decisions on the fund. In the first process, the investors get a clear picture beforehand about the investment patterns.

Volatility and risk-return:

The investors should choose a fund that has a lower 'standard deviation' as this is used to determine the volatility in the performance of the fund's NAV.

Expenses:

There are a lot of expenditures entailed in a tax saving mutual fund. These expenses include the fund manager's salary, costs for marketing or advertising of the fund, and other administration costs. The investors should consider the expense ratio of the fund before investing in it. The expense ratio precisely implies the percentage of the fund's assets that corresponds with the cost set for running that particular fund. A lower expense ratio is advantageous for the returns of the fund as the Net Asset Value is calculated after subtracting the expenses.

Other Parameters that should be considered by the Investors:

The investors must also consider the entry load and track record of the asset management company of the tax saving mutual fund. Some AMCs do not charge the entry load on investments which are made through systematic investment plans.

Some of the Top Performing Tax Saving Mutual Funds During 2007-08

SBI Magnum Taxgain
HDFC Mutual Fund (Long Term Advantage Fund)
HDFC Mutual Fund (Tax Saver)
Birla Sunlife Mutual Fund
Franklin India Taxshield

Last Updated 06/30/2011

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