Mutual Funds as Investment Vehicles
Mutual funds have been a popular investment vehicle for decades, offering conservative investors an avenue to grow their wealth steadily over time. However, with the increasing number of investment options available in the market, making smart investment decisions has become relatively complex.
Benefits of Tax Saving Mutual Funds
One of the attractive options is tax saving mutual funds, which serve not only as an investment window but also as an excellent tool for reducing your tax liabilities. With a strategic approach towards tax saving mutual funds, you can attain financial freedom in due time, and here are some expert tips on how to do just that.
Equity Linked Saving Schemes
To start with, tax saving mutual funds (or Equity Linked Saving Schemes – ELSS) offer dual benefits: you invest in equity markets and save tax up to INR 1.5 lakh under Section 80C of the Income Tax Act. These funds have long been one of the favored investment options due to their return potential and tax efficiency. Moreover, apart from tax benefits, these funds have proven to offer higher returns compared to traditional investment tools like fixed deposits.
Aligning Investments with Financial Goal
However, investing in tax saving mutual funds is not only about the tax advantages; it should align with your overall financial goal, risk tolerance, and investment horizon.
As implied by their nature, tax saving mutual funds are designed with a specific goal in mind: to save taxes and create wealth over the long term. To achieve that end, an investor needs to have a proper plan that takes into account all the variables such as risk level, return expectation, and a specific timeline. This is where sinking funds come into play. A sinking fund is a pool of money set aside for a specific goal or for unexpected expenses.
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Asset Allocation and Fund Selection Strategy
Asset-allocation and fund selection strategy plays a significant role in your mutual fund returns. While deciding on a particular tax saving mutual fund scheme, don’t just focus on returns. Look at other aspects too like the fund’s long-term performance, the fund manager’s experience, and the portfolio of the scheme. Also, diversify your investment across sectors and market caps to mitigate the risk and aim for stability in returns.
Disciplined Approach to Investing
How you invest your funds also matters a lot. It is advisable to adopt a disciplined approach towards investing. Instead of investing an amount in one go (lumpsum investment), it would be beneficial to opt for a Systematic Investment Plan (SIP). SIP gives you an advantage of rupee-cost averaging and removes the requirement of right-time entry into markets.
Long-term Perspective and Market Volatility
Further, it’s essential not to hurry into exiting your investment. Tax saving mutual funds come with a lock-in period of three years, the shortest among all 80C options. Holding onto your investments even after the lock-in period can give higher returns. As mutual funds are subject oriented, market risks, so a long-term horizon is needed to ride out the market volatility.
Portfolio Review and Monitoring
It’s recommended to review your portfolio periodically but avoid excessive churning of your portfolio based on short term market performances. Regular monitoring will help you understand if the funds are aligned with your financial goals and whether they need readjusting concerning your risk profile. However, remember that successful mutual fund investing is all about managing risks, not avoiding them.
Role of Financial Advisors
Working with a financial advisor can be an added advantage for you. The financial advisors enrich you with the knowledge about the different aspects of tax saving mutual funds and can guide you based on your financial objectives and risk profile. An advisor can also help you align your mutual funds with other investment strategies and devise a comprehensive financial plan that caters to your financial goals.
Importance of Patience
Last but not the least, be patient. Being impatient and expecting quick returns could be detrimental to your mutual fund investments. As mutual funds mostly work on the principle of compounding, the longer you stay invested, the larger your returns can be.
Conclusion
In conclusion, the path to a successful investment in tax saving mutual funds does not need to be complicated, provided you approach it with the correct perspective and information.
The journey can be smoother by understanding sinking funds, having a defined investment goal, a disciplined approach, regular monitoring, and a bit of professional advice. Mutual funds can indeed be the key to a worry-free financial future if embarked upon wisely.
