Along with saving, people also consider tax saving to be an important parameter when investing. Most investors actually invest in a tax saving mutual fundthat gives them tax saving benefits under section 88 of the Income Tax. This is the main reason why people invest in such portfolios. This may seem feasible but it is too risky to let tax saving influence your decision for fund selection. Instead treat the tax benefit offered as just an add-on; you will be able to treat tax saving funds equally with regular diversified equity funds.
So, select tax saving funds as you would select any other diversified equity fund. This means that you will have to look into other aspects like performance, investment approach, expenses and other criteria. Below are a few parameters that you need to look into before you choose the right tax saving investments --
Performance -- It is important that investors take a look at the net asset value returns of the tax saving mutual fund. Performance may not be the most important parameter to influence your decision, but it is an important aspect that the fund should establish itself.
Check if the tax saving mutual fund has a good performance vis-à-vis the benchmark index as also its peer group. As tax-saving funds have a lock -- in period of 3 years, the performance must stand out over a longer time frame like 3-year or 5-year. While evaluating the mutual fund, check the premium consistency across market phases. Choose a tax saving mutual fund that has performed reasonably well.
Investment style -- You must check the investment style and approach of the fund manager. Ideally, mutual funds are either managed through strong systems or they are taken care of by strong individualistic trait, where a fund manager has the liberty to make the investment decision.
The first style is most preferable out of the two. This is because the investment team follows a well-defined process that the investor is aware of, thus there's no room for unpleasant surprises. The investor is also aware of the risk level he's running.
Expenses -- When you opt for a tax saving mutual fund the process that runs your investment entails costs like fund manager's salary, marketing/advertising costs and administration expenses. Your cost of investing in a mutual fund is measured by the expense ratio. This ratio stands for the percentage of the fund's assets that are used completely to process the fund.
Mostly, tax-saving funds work with an expense ratio ranging between 2.25-2.50 per cent. A lower expense ratio has a positive impact on the returns of the fund as the net asset value is calculated after subtracting the expenses.
Mutual funds as tax saving investments is a great option provided done with care. Make sure you have some expert to advice you while investing in one.
Selecting the right tax saving mutual fund