How to select the right tax-saving mutual fund scheme for you

Taxpayers can save a good portion of the tax money by investing in several schemes such as Provident Fund (PF), NPS (National Pension Scheme), Equity-Linked Savings Scheme (ELSS), etc. ELSS, also known as Tax Saver Mutual Funds have widely used investment options for taxpayers because they usually have a higher return on investment compared to the other options. ELSS funds can save up to INR 46,800 in tax benefit under section 80C for taxpayers upon investing up to INR 1.5 Lac. You can also choose to invest more than INR 1.5 Lac since tax saver funds not only save tax, they also build wealth by yielding great returns on investment. Choosing the right tax-saving mutual fund is the first step of investing in ELSS. If you are looking to get the best out of a tax-saving mutual fund scheme, there are certain ways you can analyze the funds available in the market which help shortlist your options. The funds you invest in should not only have great returns, but it should also provide you great flexibility in terms of investment amount and lock-in period, to help you achieve your financial goals. Mirae Asset Tax Saver fund is an exemplary fund that has been performing consistently in the Indian market; you can check its performance and other information using the link: https://scripbox.com/mutual-fund/mirae-asset-tax-saver-fund-regular-growth.

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How to select the right tax-saving mutual fund scheme

Most tax-saving mutual funds have a lock-in period of 3 years. Investing in these funds is a long-term commitment. Selecting the right fund could be overwhelming, these are few of the ways you can choose the right fund for you.

Choose Consistency over Current Performance

Once you start your research, you may be tempted to invest in the current top-performing fund with the highest annual growth. The returns for a fund depend on several factors including the fund portfolio, market volatility, fund strategy, etc. The current performance does not guarantee future returns, as mentioned above, in the long term this fund may not be the top performer. However, if the performance is consistent over the years, it may be better suited to reach your financial goals. If you are planning to invest for 3 years into a tax-saving fund, it is advised to go for a fund that has had a good overall return in the past 3 years. You can also check for consistent growth in fund size (Assets Under Management), which implies the trust of other investors in the fund. Consistent performance is a sign of good strategy and portfolio management. Mirae Asset Tax Saver fund has been performing in the top 10% in terms of annual return and growth rate of size.

Check Diversity and Composition

Most tax-saving funds available in the market invest the fund in various equity-related shares and securities including Large-cap, Mid-cap and Small-cap equity options. Most large-cap companies have consistent performance, whereas Small-cap equity is riskier with a lot of volatility. Diversity plays a crucial role in reducing risk. It is also important to understand which companies these funds are composed of. It helps in assessing if the risk category of the fund is in line with your risk profile. For example, Mirae Asset Tax Saver Fund (MATS) invests 74% of the fund in giant and large-caps, 20% in mid-caps and 6% in small-caps. MATS fund falls in the “Moderately High Risk” category. 10% of the Mirae Tax Saver fund is invested in the equity of HDFC bank, making it the highest investment into a single company. 7% of the fund is invested in Reliance Industries, 5% is invested in both ICICI bank and Axis bank. And 4% is invested in State Bank of India.

Analyze Risk vs Return

Higher risk is usually rewarded by high return. It is important to understand the risk vs reward of the fund you are going to invest in. You can do it by studying the portfolio of the fund. In some cases funds tend to invest in more risk aggressive equity instruments, some stick to low risk – low return portfolios. Finding the right fund which suits your risk profile can help you reach your financial goals easier.

Another key parameter in decision making is the expense ratio. The expense ratio is the cost charged by the fund management company for managing your investments. Lower expense ratio usually means lower costs for investors. Investing in mutual funds is subjective to market risks, by using the above analysis you can find the right tax-saving fund for you. You can refer to Mirae Asset Tax Saver Fund for more information on how the fund is structured for diversity and consistency.

 

 

Post Author: Jennifer Slegg

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