Mutual funds fall into various categories like equity mutual funds, debt mutual funds, hybrid funds, tax saving mutual funds, etc.
In this article we will discuss equity funds and tax saving funds.
At the onset, let us understand that all tax saving mutual funds are equity mutual funds, but all the equity mutual funds are not tax saving mutual funds.
What is equity mutual Funds?
A mutual fund scheme that primarily invests in equities or stocks is called equity mutual funds. To be called an equity fund in the Indian context, the mutual fund must have a minimum 65% equity exposure. The rest could be in a mix of debt, or equity related instruments or commodities etc.
The equity mutual funds could be actively managed, or passively managed as in the case of index funds. The geography, investment style of the holdings in the portfolio of the fund, and the company size are the criteria for the categorization of the equity mutual funds.
Equity mutual funds can be single country, regional, or broad markets depending on whether they are investing into companies only in India, a region or in international stocks.
Unlike Equity funds where the size of market capitalization determines the size of the fund, the investment style of the stock holdings in the mutual fund determines the categorization in size of equity mutual funds.
Mutual funds that invest in specific sectors like pharma, commodities, healthcare are known as sectoral funds.
The equity mutual funds also cater to different categories and offer a basket of choice for every type of investor. The different categories that an investor can choose from, while investing in mutual funds are large cap, midcap, small cap. Some mutual funds like the hybrid funds or multi asset allocation funds invest in a mix of large cap, midcap and small cap in different ratios depending on their investment goals.
What is tax saving mutual funds?
As the name implies the tax saving mutual funds helps you to save on your taxes. These mutual funds are a type of equity mutual funds and are also called equity linked saving schemes, as they predominantly invest in equity and equity related instruments.
ELSS funds invest 80% of their assets in equity, as well as equity related instruments. The ELSS may be closed ended or open ended depending on the time for which their subscriptions are open. Once you invest into this tax saving mutual funds, you have to remain invested in it for the 3-year lock in period. So, they offer a potential of mid to long term capital gains from the equity markets. However, the greatest drawing point of ELSS is that they help you to save taxes. Section 80C of the Income Tax Act 1961 allows a maximum deduction of Rs 1,50,000 from your taxable income, The ELSS are important instruments under Section 80C, as they offer the dual opportunity of wealth creation coupled with tax saving benefits.
Consult your financial advisor or mutual fund distributor today for advice on including this tax saving mutual funds into your equity portfolio.
