A mutual fund investment pools money from many
investors and attempts to reward them with profit. This profit is generated
through investments in companies and income-generating opportunities. The
profits earned by the fund scheme are distributed amongst the investors in the
form of regular payouts or a large one-time payment at the end of the fund’s
tenure.
Tax saving mutual funds like ELSS do the same thing,
but also give enable you to obtain exemption of up to Rs.1,50,000 of your
annual income from tax in India.
Investments that can provide the highest yield are
equity investments - but these are considered to be high-risk. Lower-risk
investments in debt instruments also exist, but they cannot match the high
returns provided by equity investing. Mutual funds differ primarily based on
the type of asset class. There are three primary types of mutual funds on this
basis:
Equity-oriented funds - which invest primarily in
stocks and shares of companies.
Debt-oriented funds - which invest primarily in
treasury bills, certificates of deposit, bonds, etc. of companies and the
government.
Hybrid funds - which invest in a mix of both. A
hybrid fund can be either an equity-oriented hybrid fund or a debt-oriented
hybrid fund depending on where at least 65% of its corpus has been invested.
Equity Linked Savings Schemes (ELSS), as the name
suggests, invest primarily in equity.
ELSS pools money from many investors and invests most
of it into stocks and shares of companies and invests the remainder into fixed
income securities like bonds. The fund has a 3-year lock-in for investors,
meaning that the fund manager has a 3-year timeframe in which to maximize the
possible returns on investment. This investment avenue has gained a lot of
popularity in recent years as a way to save on taxes - as Indian taxpayers can
reduce their taxable income by Rs.1,50,000 under Section 80C of the Income Tax
Act, 1961. Income earned at the end of the 3-year tenure is also exempted from
taxation if it’s under Rs.1 lakh, any income over Rs.1 lakh is taxable at 10%
under Long-Term Capital Gains (LTCG) tax.
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