Tax efficient Mutual Funds - why SIP helps
For any potential high returns on investment, it is very important for you to take informed investment decisions. Any decision to invest your funds has to be taken after duly comparing the various plans that are on offer. These days, mutual funds (MFs) have emerged as one of the primary beneficial modes of investment and people invest in mutual funds for the rate of optimum returns that they offer. However, when viewed from the point of view of taxation, mutual funds do not have offer significant benefits. Apart from the limited tax benefits, mutual funds also come under the purview of LTCG (Long Term Capital Gains) taxation. However, there is an exception to this general truth about mutual fund-investment. This exception comes in the form of Tax-efficient mutual funds. The mutual funds that generally come in this category are ELSS or Equity-Linked Savings Schemes. ELSS is the category of mutual-funds that utilizes equity-based instruments as vehicles of investment and at the same time, offers tax benefits under Section 80C of the Income Tax Act, 1961. Under this Section, payable contributions towards ELSS are eligible for tax-exemptions up to a limit of Rs. 1.5 Lac in the given financial year.
An ELSS comes with a lock in period of three years which is significantly lower than that of ULIPs (which have a lock-in period of five years). This not only ensures disciplined and regular investments but also makes ELSS suitable for short term pursuits of capital gain. This can be effectively done through a Systematic Investment Plan (SIP). An SIP enables the investor to put in regular amounts of premium at pre-decided intervals towards maintaining the ELSS and therefore, an SIP guarantees that the investor does not have to fret about limited availability of surplus funds for investment purposes.
Investments made towards ELSS have a set of beneficial and market-linked returns that may be garnered over a period of time. These benefits may either be in the form of a lump-sum payment, which is payable after the maturity of the scheme term or in the form of regular payouts, which are payable throughout the scheme term. This serves as a point of classification between these tax-efficient mutual funds. ELSS can be broadly classified as growth-driven schemes and dividend-driven schemes. A dividend oriented ELSS is the one that offers regular pay outs from the invested corpus during the term of the scheme. Since ELSS comes with a lock in period of three years, therefore, the scheme term for the regular payouts can be taken to be three years. In contrast, a growth oriented ELSS is the one that has the main feature of a single, lump-sum payout to which the investor is entitled after the maturity of the term of the scheme.
HDFC Life offers various savings and investment plans that are aimed at ensuring the growth of your funds and securing your financial future. For details, click on the mentioned link: https://www.hdfclife.com/savings-plans .
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