Are you looking for the right tax-saving Mutual Funds to invest in? Congratulations! We have exactly what you need.
Are you planning to invest in Mutual Funds this year? If your main intention for doing so is to save tax, we have just the right Mutual Funds for you to invest in. Additionally, we also have a few quick pointers on things you must know before investing in Mutual Funds (especially for saving tax).
Additional Reading: Everything You Need To Know About New Fund Offers In Mutual Funds
Here are a few tips:
Never Ignore The Associated Risks
Remember all those Mutual Fund TV commercials with superfast scripts at the end that almost sounds like gibberish? Well, that’s actually some wise person warning you about the risks associated with investing in Mutual Funds.
Even if you ignore those warnings (like the rest of us), there’s something you always need to remember—tax-saving schemes are expected to invest at least 80% of the money in shares. Most times, they are fully invested in shares to maximise the returns. This simply means that you need to prepare yourself for market volatility.
Additional Reading: Mistakes That May Spoil Your Tax Saving Plans
History Doesn’t Always Repeat Itself
Some schemes might have performed really well in the past, but there’s no guarantee they will perform well again. The performance of any asset class is likely to fluctuate with time. The only way to make things work in your favour is by balancing risk and reward by selecting the right scheme to match your expectations.
The Investment Period Can Go Beyond The Lock-In Period
You don’t need to immediately sell your holdings as soon as the lock-in period ends. It would be wise to continue to stay invested for the long term so you can maximise your returns.
Additional Reading: When To Withdraw From A Mutual Fund
Returns Are Taxable
The long-term capital gains earned on tax-saving funds were tax-free until the end of FY 2017-18, but now all long-term gains over Rs. 1 lakh will be taxed at the rate of 10%. Also, the dividends will be taxed at the rate of 10%.
Additional Reading: LTCG On MFs- Should You Switch To Other Options?
Recycling Is An Option
If you’re a seasoned investor in tax-saving funds, you can sell your existing tax-saving funds. The proceeds can then be reinvested in other tax-saving funds that work better for you.
Now that you know everything you need to know before investing in tax-saving Mutual Funds, here’s a list of the best investment options for this year:
| Scheme name | 1-year returns | 3-year returns | 5-year returns |
| L&T Tax Advantage | 23.45 | 13.19 | 19.24 |
| DSP BlackRock Tax Saver | 15.07 | 11.72 | 19.98 |
| Aditya Birla Sun Life Tax Relief 96 | 25.72 | 11.67 | 21.8 |
Additional Reading: Budget 2018 – Impact On Mutual Fund Investors
The Parameters
The main parameters used to shortlist the above mentioned Mutual Funds are:
- Mean rolling returns: Rolled daily for the last three years.
- Consistency in the last three years: The three-year period is divided into smaller time periods each with a progressing weightage.
- Downside risk: We have considered only the negative returns given by the Mutual Fund scheme for this.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
- Outperformance: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a Mutual Fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme – [Risk-Free Rate + Beta of the Scheme * {(Average return of the index – Risk-Free Rate}
- Asset size: For equity diversified funds, the threshold asset size is Rs. 100 crores, and Rs. 50 crores for balanced funds.
Now that you have everything you need to know about tax-saving Mutual Funds, it’s time to invest in one. Don’t worry! We can help!