Types of Tax Saving Mutual Funds

Equity Linked Savings Scheme, commonly known as ELSS,is one of the most popular tax-saving investments offered to investors. ELSS funds are equity mutual fund scheme that invests at least 80% of their portfolio in equity and equity-related investments. These tax saving mutual fundsprovide the dual benefits of tax saving and capital appreciation. An investor enjoys tax benefits of up to Rs1.5 Lakh on their annual taxable income under Section 80C of the Income Tax Act, 1961. You can save as much as Rs46,800 each year provided that you fall in the highest tax bracket, i.e., 30%. Let’s delve on the types of ELSS funds offered to investors.

Types of tax saver mutual funds

There are three types of schemes under ELSS mutual funds. They are explained as follows:

  • Growth option – Under this scheme, the investordoes not get any benefits in the form of dividends. The investorwould instead receive the benefits at the end of the tenure that will aid in improving the Net Asset Value (NAV) and thus multiplying your profits, thanks to the power of compounding. Also, this schemeisentirely dependent onmarket conditions. So it might work in your favour or mighttake a downhill but it has the potential to generate significant profits.

  • Dividend option  Under this option, the investor, with the timely benefit of dividends in contrast to the wholesome amount as in growth option. The best part about this schemeis that the investor receives is not liable to pay any taxes to the government for the dividends received and thus would receive the entire amount.

  • Dividend Reinvestments option – Finally, ELSS policyholder has another option, i.e. a dividend reinvestment option. Over here, the policyholder has the choice of giving back the dividends received to add on to the NAV of the fund. It is anappropriate option in case the market is performing very well during the entire 3-year tenure of the Lock-in period. In this scheme, you end up gaining substantially from the fund and eventually leaves you with a good handsome amount during withdrawal of the fund.

ELSS funds are ideal for investors who have a certain degree of risk profile and are looking to invest for a long tenure. Before you invest in ELSS funds,consider your investment horizon, financial goals, and risk profile carefully. You can also avail the services of a mutual fund expert if you want some clarity on any investment concept or need help managing your portfolio. Happy investing!


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