I am 27 and started investing in mutual funds 1 month ago. I have started a systematic investment plan (SIP) in DSP BR Tax Saver for Rs3,000. I am looking to investing in Axis Long-term Equity (Rs3,000) and Principal Balanced (Rs3,000). My horizon is about 5 years, risk appetite is moderate and goals are high returns and tax saving. Please suggest if these two funds are appropriate?
—Name withheld on request
There are three types of tax savings one can have with investing in mutual funds: tax deductions, tax exemptions, and indexation benefits. The first one, tax deduction, applies only to equity-linked saving scheme (ELSS), which are tagged as tax-saving schemes. Using these funds, the money invested in them would be subtracted (deducted) from the taxable income of an investor, thereby reducing the tax outgo. Investments in these funds are locked for 3 years but any gains after this period would be tax exempt. There is a limit of Rs1.5 lakh on this annually. The second type—tax exemption—would apply to domestic equity-oriented funds. Many equity funds such as large-cap funds, diversified funds, and balanced funds would fall in this category. In this case, the profits made after at least 1 year of holding will be considered ‘long-term gains’ and be exempt from tax. However, the money invested in the fund itself would have to be after payment of tax. The third type, indexation benefit, applies to all other types of mutual funds, specifically debt funds, and provides the benefit of reducing the tax outgo by reducing the reportable gains from an investment. You are investing in two tax deductible funds (for a total of Rs72,000 per year), and in a balanced fund (for Rs36,000 a year). You will get the benefit of reducing your taxable income with the first fund, and exemption from taxability of long-term gains from your balanced fund. The category of funds that you have chosen fit your timeline, risk tolerance, and objective. In terms of fund selection, you are doing fine with your tax-saving funds. For the balanced fund, please go with ICICI Prudential Balanced fund.
