Best Tax Saving Mutual Funds Guide – Maximize Returns & Save Tax

Tax-saving investments in mutual funds in India hold a powerful option when one sits down to consider building wealth while saving on taxes at the same time. Particularly, ELSS funds i.e. Equity Linked Savings Scheme, allow investors to reap the benefits of capital appreciation over a longer period while providing tax deduction benefits.

We will guide you through the entire process of selecting what you consider to be the best tax saving mutual funds, understanding their logic, and utilizing informed decision-making to lower your tax liabilities while securing better returns on investments in this deep dive.

Tax Saving Mutual Funds - What Are They?

Mutual funds that provide a deduction for taxes, notably ELSS, are equity-focused mutual funds with a mandatory lock-in of three years. As per provisions of Section 80C of the Income Tax Act, investments not exceeding ₹1.5 lakh in ELSS funds are tax-deductible, which can lower your taxable income by that much every year.

Particularly, what makes ELSS different compared to other instruments under section 80C such as PPF and NSC is the highest growth potential, shorter lock-in period, and greater flexibility regarding SIPs or lump sum contributions.

Why Consider ELSS for Tax Saving?

This is the reason why ELSS is different from other 80C tax saving investment options:

Shortest Lock-in: 3 years as compared to 5-15 years with other options.
High Return Potential: Average long term returns of 12-15% (market linked).
Flexibility: Starting SIPs as low as ₹500.
Diversification: Investments measurable in sectors and market caps.

Nonetheless, ELSS has its drawbacks of some market investment risks, making careful fund selection crucial.

Top Features to Look for in the Best Tax Saving Mutual Funds

Here are the most weighted features that come with the best mutual tax saving funds (ELSS):

1. Consistent Performance

Put more of a scope than expected returns to outperforming specific benchmarks. Funds tracking need to outperform their respective index for the past 5-10 years.

2. Fund Manager Expertise

Critically analyze the fund manager’s track record. Focus on bear market phases. They are likely to have better volatility managed with experienced managers.

3. Portfolio Composition

Having diversification across sectors and market caps reduces concentration risk. A good ELSS fund often holds large-cap and mid/small-cap stocks to balance risk and returns.

4. Expense Ratio

The lower the expense ratio, the better (ideally lower 1.5% for regular plans). It reduces overall returns in the long term, though.

5. Volatility & Risk Metrics

Using tools such as the Sharpe Ratio, Beta, and Standard Deviation, one can compare these values to see how the funds manage and mitigate risk.

SIP vs. Lump Sum: What’s Better?

SIP (Systematic Investment Plan): It is advantageous for employees with a steady income as well as for novice mutual fund investors. SIPs mitigate the impact of large market changes.
Lump Sum: A good option for people receiving an annual bonus or those with surplus cash lying idle. It is beneficial in rising bull markets but carries risks concerning timing.

As a best practice, begin a monthly SIP and make additional investments in bulk during market slumps or at the end of the financial year.

Taxation on ELSS Returns

With the merits of ELSS providing 80C advantages, beware of the following tax issues:

Profits greater than 1.25 lakh in a financial year will incur a 12.5% tax under LTCG (Long-Term Capital Gains)
Dividends, if any, are taxable in your hands as per the slabs.

Therefore, while the ELSS manages to lower the taxable income, consider the strategies for divestment to optimize the tax burden on profits.

Things You Should Know About DealPlexus and Mutual Fund Investments

Finding the ideal tax saving mutual funds can be a daunting task which is made more complicated with the availability of 40+ ELSS schemes. This is where DealPlexus comes into play.

Heard of smart ways to achieve tax benefits? DealPlexus automates the process of mutual fund investment in India. It does so use automated fund lists made by specialists, goal planning, and their patented performance tracking, hence making tax saving investments easier at the touch of a button.

Whether you have never invested before or already have an existing portfolio, DealPlexus gives clarity and flexibility allowing you to invest without hesitance.

The Bottom-Line

Tax planning will never be tedious and chaotic with the right tools. The right set of tools allows you to diversify savings plans into ventures that build enduring wealth. Knowing what risk rates suit you best blended with smart tools such as DealPlexus allows you to minimize your taxes while maximizing your returns.

While saving every rupee is as good as earning it, the real power lies in multiplying wisely invested rupees.