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How are you saving tax this season? 10 funds saved tax & delivered 30% returns too
February, 13th 2017

Till about five years back, if somebody would have come and explained to you what a mutual fund is, the most likely response from you would been: thanks, I am happy with my fixed deposits and stocks. Mutual funds are risky.

Things have changed since then. Investor education has brought in that change, which is now reflecting in the numbers.

Investors no longer fear equities and they now trust mutual funds as a safer route to beat inflation and create wealth over time compared with other asset classes.

The number of dematerialised (demat) accounts opened in India last year was the highest since the 2008 financial crisis.

As many as 2.4 million new accounts were opened in 2016, according to data from depositories National Securities Depository and Central Depository Services. That compares with nearly 3 million accounts opened in 2008.

A demat account is mandatory for an investor to invest in securities such as stocks and bonds. It allows securities to be held in a digital format compared with physical form earlier.

Latest data showed that the assets under management (AUM) of the mutual fund industry touched an all-time high of Rs 16.46 lakh crore in December, according to the data from the Association of Mutual Funds in India (AMFI) and expects to cross Rs 20 lakh crore this year.

Mutual funds also became popular with investors after some category of funds, called equity-linked savings scheme, became eligible for tax-saving investment. Some of these funds have delivered handsome returns to investors over the past one year.

Here are 10 funds under equity-linked savings scheme (ELSS), which not only helped investors save on tax outgo but also delivered returns of over 30 per cent in the last 12 months, which is more than what the S&P BSE Sensex delivered. Other asset classes, too, failed to match that performance.

Motilal Oswal MOSt Focussed long-term fund delivered a one-year return of 40 per cent, followed by Mirae Asset Tax saver fund which rose 39.29 per cent, and HDFC Tax Saver fund grew by 39.14 per cent in the same period.

The government of India provides tax rebate under Sec 80C of the Income Tax Act, 1961. Anybody who invests up to Rs 1,50,000 per year into a specified list of investment products is eligible for this amount to be reduced from their taxable income.

The list of specified products includes various items like bank deposits, small savings schemes, equity-linked saving schemes of mutual funds, bonds.

Benefits of ELSS:

ELSS is similar to a diversified equity mutual funds. It offers an option for long-term investing with one of the shortest lock-in period among tax-saving investments (mandatory 3 years of lock-in period).

"If you do this right with a plan for your future, the government is happy to forgo tax revenues to encourage you to do the right thing! There is only one catch, such products have a lock-in ranging from three years to seven or eight or 10 years, depending on what product you pick; the horizon may vary but lock-in is a must!," said a Motilal Oswal report.

"If one has to necessarily lock in money, one might as well lock it into a product which has the least lock-in with highest possible potential for a return to take us closer to our goals," it said.

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