Are all Equity Funds Tax Saving Mutual Fund? 

Are all Equity Funds Tax Saving Mutual Fund? 


Although one can invest in mutual funds even without having prior knowledge about investing, investors must try to understand some of the mutual fund basics. That is because it will help them understand which mutual fund scheme can be used to target their specific financial goals. In the recent past, mutual funds have offered far better capital appreciation over the long term as compared to conservative investment options like bank FDs or public provident funds. Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities to achieve a common investment objective. What an Asset Management Company (AMC) owning mutual fund does is that it collects money from investors whose investment objective aligns with that of the scheme, invests the capital raised across asset classes and money markets instruments.

Among the several mutual fund schemes out there, ELSS  is the only equity mutual fund scheme that comes with a tax benefit. Equity mutual funds aim at generating capital appreciation over the long term by investing in equity and equity related instruments of companies across market capitalization. However, ELSS scheme with the dual benefit for savings as well as relief for taxation. Under Section 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 per fiscal year and claim for tax deductions. Also, there is a three year lock-in period, which is the shortest if compared to other tax saving instruments that fall under Section 80C.

Are all equity funds ELSS schemes?

The answer to this question is NO. ELSS is the only equity mutual fund scheme whose investments can be claimed as investment proof for tax benefit. However, long term capital gains from equity mutual funds below Rs. 1 lakh are exempted from tax deduction. Also, for other equity funds a 15 percent is applicable on all short term capital gains. 

Like all equity mutual funds, ELSS comes with multiple investment options. Depending on your investment objective, risk appetite and flow of income you can either start a monthly SIP or you can make a one time lump sum investment right at the beginning of the investment cycle. A Systematic Investment Plan might be an ideal approach for anyone who wishes to inculcate the discipline of regular investing. Through SIP, an investor can continue to invest in any mutual fund scheme of their choice till their investment objective is accomplished.

A Systematic Investment Plan is a tool for investing small fixed amounts at regular intervals in ELSS fund. Since you will be investing for a minimum period of 36 months, with SIP you might be able to save tax and gradually build wealth. Also, investors are free to check for SIP calculator, a free online tool accessible to everyone and get a rough estimate on the returns that they will earn at end of their investment journey. SIPs are flexible as you can increase / decrease your monthly investment amount or even skip month’s SIP. If the ELSS fund you invested in isn’t performing well, you can even stop the monthly SIP and switch to a better performing scheme.

As of now, ELSS is the only mutual fund scheme that comes with a tax benefit. However, since this an equity oriented scheme, the investment portfolio of an ELSS fund is constantly exposed to market’s volatile nature. Investors are expected to determine their risk appetite before investing in this tax saver fund.


David Lockhart