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Investing for tax saving through mutual funds
November, 14th 2014

It’s month of November and most of us will be heading for submitting our investment proof to our employers in next few months. During this period tax planning takes a centre stage due to the last opportunity to invest for reducing your tax liability and avoiding high tax deductions. Although there are many investment instruments which meet this objective mutual fund too gives larger benefits as most of us looks for a lumpsum investments. But before you ponder into any tax saving instrument especially at the yearend it’s beneficial to understand it so that your risk tolerance can match your investment.
Here is what is available in mutual fund for tax planning and what you should consider:

1. ELSS
Equity Linked Savings Scheme has been for a long time now. . With a three year locking this scheme is well suited for deriving gains from equity markets. However the underline investment being in stock market it has its inherent risk which every investor has to consider. Within ELSS category schemes invest in different segments of markets which actually differentiate the volatility. For example Franklin India Tax shield has almost 70% in large cap stocks while Reliance tax saver takes almost 60% exposure in mid and small cap stocks. This variation will produce the different level volatility and variation in returns. This differentiation is also a decisive factor in resulting of performance consistency.. So when you are investing an ELSS scheme you have to understand the nature of investment to gauge the volatility in the scheme. The risk and return will vary accordingly.

You can claim exemption Under Sec 80C by investing in ELSS schemes. This benefit limit has been enhanced to R 1.5 lakh in budget 2014. Even at year end by investing as a lumpsum in these schemes you are eligible for the exemption. But whenever you are taking the decision ensure you go deep in analyzing it.

2. RGESS
Known as Rajiv Gandhi Equity Savings Scheme this was launched in 2012 with an aim to get more small investors in the stock market. By investing up to R 50000 you can claim deduction upto R 25000 from your income. The scheme has gone changes in budget 2013 wherein you are allowed to stagger the investment in three assessment years instead of only first year. The scheme has stipulated certain conditions like Income below R 12 lakh, Lock-in of three years and many others which needs to be fulfilled to claim the deduction. Also the scheme rest conditions on selling the investment else deduction get reversed. Initially it was aimed at direct equity investments but post launched most mutual funds houses have come out with RGESS schemes. The benefit you avail is under Sec 80CCG which is over and above 80C benefit.

RGESS scheme is targeted mainly at new investors i.e. someone who have not exposed himself/herself to equity markets. The scheme has its concern on the manner it is structured especially allowing selling equity investments very early. If you have not exposed yourself to equity markets then exposing only for tax saving may not be a wiser approach. Before you make a decision its good to understanding about risk tolerance and benefit of long term investing. At times the benefit in tax saving through this route may not be good enough for the risk.

Tax saving is an important element in your financial planning. You need to get it right to avoid any disappointment. If you miss it and end up investing at year end mutual funds do give you choice. Avoid investing without knowing about it and ensure you are ready to hold your investment longer if market conditions are not in favor for redeeming your money.

 
 
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