Tips to select topTax Saving Mutual Funds to Invest

Tax saving mutual funds or equity linked savings schemes (ELSS) are touted as one of the smartest ways of saving tax. Investments in such tax saving funds come with a dual advantage:

1. Investment upto Rs. 1,50,000 in an ELSS mutual fund is allowed as a deduction under section 80C of the Income Tax Act.

2. Investment in such funds has the potential to generate high returns as these tax saving funds invest primarily in equity and equity linked instruments

So basically, you are not just saving tax on your hard earned money but are also putting it to work to generate further returns. ELSS is simply a type of equity diversified fund which invests a majority of fund's assets in equity shares of companies. By maintaining a well-diversified portfolio, the fund manager seeks to generate higher returns while at the same time protect the portfolio from downside risk. Considering the popularity of this tax saving option, investors need to be aware of how they can choose the best tax saving mutual fund that is most suited to their requirements.

Choosing the Best ELSS fund

It is important to choose a tax saver mutual fund which suits your risk-carrying capacity and will work towards your investment goal. Historical returns, volatility, fund manager experience and expense ratio are some important parameters which should be considered when looking for the best tax saving mutual fund to invest in. Since these funds invest in equities, it is also important to examine the risk-return profile of the underlying assets. Large-cap funds are generally less volatile and one can expect around 12 to 15% annual return from large-cap funds over the long-term. Small-cap funds are considered highly risky but have the potential to generate around 18 to 20% annual return over a longer investment horizon. Mid-cap investments usually lie at the centre of the risk-return spectrum. The past experience and performance of fund managers play an important role in formulating the future performance expectations of any fund. Another aspect to pay heed to is the expense ratio. A small change in expense ratio can affect returns in the longer term. It is better to choose a fund with a lower expense ratio but not always. Key factors to focus on when looking for the best tax saving mutual fund:

· Don't chase the stars – When looking to invest in a tax saver mutual fund, don't assume that the top performing funds in the current year are the best tax saving mutual fund. Look at the historical performance of all funds and go a step beyond performance to also check for style and stability.

· Consistency is sacrosanct – Avoid one hit wonders. Look for funds that have consistently given good returns and avoid funds that have volatile swings in their performance. The key is to invest in funds that have performed in upturns as well as downturns.

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· Look under the hood for fund composition – All tax saving mutual funds do not invest in the same instruments. Thus, it is important to check the portfolio composition, fund manager style and the risk-return framework of the fund.

The best tax saving mutual fund would be the fund which fits in with your overall portfolio and strategy and suits your temperament.