7 tips and strategies for investing in tax saving funds to gain maximum returns



The season of tax-saving has just begun, and investors are retrospecting different tax saving options to maximise their return on investment. With so many choices around, the present dilemma for the investors is in choosing the best tax saving option that meets their needs. However, the scope of return on investment can be widened by strategizing and formulating respective financial goals in an efficient manner.

Maintaining the right balance between investment and returns has always been a challenge for investors. The busy schedule and lack of time these days have, however, been one of the biggest obstacles that lead their effort into an abyss. Therefore, while choosing the right tax saver, considering several factors like liquidity, safety, transparency and returns give a better perspective on how your income would be taxed. Here are some tips and strategies for making a productive investment in tax saving funds.

Here are 7 tips & strategies to help you invest in tax saving funds:

1. Conduct a Thorough Research Before Investing


If you are planning to invest in a tax-saving mutual fund, the first and foremost job would be to have a thorough research. There are various tax saving investment funds, and each one of them has certain benefits and limitations. The limitation won’t bother you as long as you step ahead with a clear cut approach as to how you are planning to invest your money. Moreover, the scheme that you are selecting should meet your purpose like ULIP is suitable for risk-averse investors while ELSS is suitable for high-risk takers. So, when you are conducting research, make sure that whatever investment scheme you opt for should meet your present budget as well as future financial goals. 

2. Analyse the Cost of Investment

It’s always a wise idea to analyse the cost before making an investment. You can draw a layout of your investment plan in your mind to make it productive. One must also note that some of the tax saving funds come with the obligation of a minimum requirement of an amount that is needed to be invested in order to get the tax benefit.

For instance, in ELSS, the minimum amount is Rs. 1.5 lakh on which tax benefit is provided. However, most of the tax saving funds are exempted from maintaining a minimum balance. Therefore, it is better to evaluate the cost of your investment considering the tenure and the type of investment fund as that will give you a better perspective on your funding.       


3. Opt for Funds with Higher Return on Investment


The first priority for the investors investing in the mutual funds is to maximise their return on investment. Opting for ELSS in this context is always the best option as it offers a significant return. The annualised return for three years is 18.69% while for five years it is 17.46%. But, during investing, investors should check the portfolio as the return on investments vary for different funds.

This type of tax saving fund is promising in terms of transparency, taxability, liquidity and cost factors. Investing in ELSS tax saving fund is also beneficial if compared to other types of tax saving funds as it follows a disciplinary approach and creates a habit of investing for the investors. Moreover, investing in EPF and PPF also provides higher return provided the fact that the lock-in period is for five years.

4. Check the Flexibility on Investment 


The basis for the pros and cons of various tax-saving funds depend upon their flexibility. It can be in terms of maturity, withdrawal or shifting of funds. For instance tax saving funds like ULIP provides better flexibility in terms of withdrawal of the capital amount as there is no lock-in period. Whereas, ELSS provides better flexibility in the diversification of funds. The EPF and PPF have a higher lock-in period which makes it less promising in terms of flexibility.

Therefore, it is better for you to first decide on the type of funds in which you want to invest. If you opt for a long term option, you may have to compromise on the flexibility of withdrawal.  On the other hand, if you prefer to diversify your fund, then ELSS will be the best option for you. So, formulate your plan accordingly so that it meets your requirement.             

5. Consider the Tenure of Lock-in Period before Investment

In the case of mutual funds, the term lock-in period is used to depict the time period for which an investor is restricted from selling his investment. The lock-in period varies depending upon the type of mutual fund you have chosen. In the case of ELSS tax saving funds, the lock-in period is for three years while for ULIP funds, there is no lock-in period.

When investing in a tax saving mutual fund, it is always better for the investor to estimate his financial stability. If the investor has a stable income, then opting for ELSS or that of EPF or PPF will be productive in the long run. However, if the investor is not confident about his investment, then opting for ULIP mutual fund is the best option. It’s only because, in ULIP mutual fund, the investors can not only avert the risk of the lock-in period but also provide a sense of security as these types of funds are regulated in a systematic approach.         

6. Counter the Risk with a Calculative Approach 

The productivity of the investment depends upon how well an investor can bear the risk. Investing in ELSS tax saving funds always involves higher risk, but it also provides a higher return on investment. Opting for ULIP gives a mixture of both investment and insurance and involves lesser risk. Other popular tax savings scheme like PPF or Savings Certificate involves a lock-in period of five years, but its risk depends upon the financial stability of the investors. All of the tax-saving funds have some limitations but taking a calculative approach can lessen the chances of risk involved in the investment of the tax-saving funds.

7. Check the terms of Liquidity before Investing

The liquidity of an investment always plays a significant role. It is basically the process where any bond or asset can be quickly converted into cash. The priority of liquidity is comparatively high for short term investors who prefer tax saving funds that offer higher liquidity. In this context, ULIPS is considered to be the best option as it provides higher liquidity on investment.   
Always strategize your investment plan to gain maximum return

To make a productive investment, you have to formulate your investment plan in an efficient manner. Consider going through the tips and strategies before investing in tax funds to gain maximum returns. Besides, try to have a clear cut approach as it will not only help you to give a better insight into implementing an investment plan but will also help you to save taxes in the process.