Mutual Funds – Saving Tax

Mutual funds explained with some comment on how to save tax.

  • ELSS = Tax Saver (Saving) Mutual Funds (Schemes)
  • You can invest upto one lakh in any ELSS scheme.
    • You should check if you really need to invest one lakh, because in all probability, your employer is already deducting PF from your salary.
    • In that case, your investments should be: 1 Lakh – (monthly PF deduction x 12)
    • PF = Provident Fund = Govt’s way of making people save from their salary.
  • This investment gets locked for 3 years (lock in period = 3 years).
    • That means that if you invest Rs. 3000 today, you will get it back only after three years from today.
    • That also means that if your are doing an SIP of Rs. 3000 every month, the three years are counted for every 3000 from the month they were invested.
    • SIP= Systematic Investment Plan = Fund’s way of saying “please invest in us regularly at a definite interval”.
  • Lock in period of 3 years is good, why?
    • …because that ensures that people can’t take out money for at least next 3 years.
    • … and that makes it easy for the funds to make more money for you.
    • … also this is better than locking your money away for 5 or 7 years (in other schemes – don’t worry about them if you don’t know).
  • Which fund to choose?
    • Choose a fund (search now: that has:
      • a decent asset size and
      • and good two years performance (look at the rate of return in the last two years)
    • Frankly, every fund company has two or three Tax funds (or may be just one)
    • It’s better to keep your folios tight and invest in a Tax fund of the company where you already have funds
      • Reason: tax funds generally are better than any other tax saver investment, so you should really not worry about choosing, too much.
  • Which option to choose?
    • Choose growth option. Don’t choose dividend re-investment. That’s because you really don’t want any more money to get locked again for three years.
      • So if you choose dividend re-investment, and the fund declares a dividend of Rs. 500 at the 29th month after your investment, that Rs. 500 per unit will get locked for three more years.
      • In effect, you will get back the re-invested money after another 36 months (in case the Govt. keeps lock-in as 3 years).
      • So, you get back the dividend money after 29+36 months of your original investment.
    • Options: Growth – this means that you won’t get any dividends, but your fund’s NAV will increase intrinsically with dividend declarations.
    • Options: Dividend Payout – this means that a dividend declaration will give you back cash in your account. Some times this makes sense.
    • Options: Dividend Re-investment – Any declaration will buy you new funds for whatever money you might have got paid. Stay clear of this one.
    • NAV: Net Asset Value – Fund’s way of saying “my one unit will cost you this (NAV) much.”
  • The best way to invest is using an SIP.
    • During April, calculate what your PF amount is (assuming your appraisal and stuff is over).
    • Multiply that by 12 and then deduct it from one lakh. There you go, you have an investment figure – X.
    • Divide X by 12, and decrease another figure Y from this new Z = X / 12.
      • This Y depends on your age. Y is directly proportional to [Your Age – 28].
      • Y is the money you should invest in a fixed return investment (like Fixed Deposit, National Saving Certificates or Public Provident Fund).
      • Y is totally your call, but should be quite less than Z.
    • Your total fixed return investment becomes Y x 12, and ELSS investment is (Z – Y) x 12.
    • Your SIP should be for an amount of (Z – Y), starting in April.

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