Tax saving is an important benefit that investors seek in every investment they do. In fact many opt for a particular savings plan to just to save tax. Also, many opt for a tax saving mutual fundthat gives them tax saving benefits under section 88 of the Income Tax. Investment in such portfolios is high as people get the required tax deductions they are looking for. However, it may be risky to let tax deductions dominate your decision of selecting a mutual fund. Consider tax benefit to be just an add-on to the plan and you will be able to treat tax saving funds equally with regular diversified equity funds.
While selecting any tax saving funds try and choose them as you would opt for any other diversified equity fund. You need to look into other aspects like performance, investment approach, expenses and other criteria. Here are a few parameters that you need to look into before selecting the right tax saving investments –
Performance of the fund – Investors need to look at the net asset value returns of the tax saving mutual fund. Even if performance of the fund may not be your main criterion to select the plan, it is an important requirement that the fund should establish itself.
You need to check if the tax saving mutual fund has performed good as compared to the benchmark index as also its peer group. Tax-saving funds have a lock in period of 3 years, hence, the performance must stand out over a longer time frame like 3-year or 5-year. It is important to check the premium consistency across market phases while evaluating the mutual fund. Select a tax saving mutual fund that has performed reasonably well.
The style of Investment – It is important to check the investment style and approach of the fund manager. Mostly, these funds are managed by strong systems or they are taken care of by strong individualistic trait. Here the fund manager has the liberty to make the investment decision.
Mostly investors prefer the first style of investment. This is mostly because the investment team follows a well-defined process that the investor is aware of, thus there’s no room for unpleasant surprises. Investors are well aware of the various risks he is running.
Expenses – In a tax saving mutual fund the process also entails costs like fund manager's salary, marketing/advertising costs and administration expenses. So your cost of investing in a fund is calculated by the expense ratio. This ratio stands for the percentage of the fund's assets that are used completely to process the fund.
Most of the tax saving mutual funds work with an expense ratio ranging between 2.25-2.50 per cent. In case your fund has a lower expense ratio, it will positively reflect on the returns as the net asset value is calculated after subtracting the expenses.
How to determine which is the right tax saving mutual fund