How To Save Tax By Investing In Mutual Funds | Can We Save Tax On All Mutual Funds ?

So what if somebody tells you that you can save the tax by investing and also enjoy the privilege to earn returns from that investment? Then, the obvious thought that could probably come to your mind would be ‘it must be some long term investing schemes only where have to put your money into lock-in period of extra time.

Well, you don’t need to put your money into that long term lock-in period because now investors do have options to invest in short-term period of three years and can get tax benefits. These options are available in some of the tax saving mutual schemes. Mutual fund is a product made up of many financial instruments. Experts can balance it in a way where the overall effect of the market volatility doesn’t affect as it gets divided by smart choice of stocks and debts.

These portfolios include equity, short term and long term debts along with other diversified fixed income financial products such as fixed deposit, post office scheme and such. A wise fund manager can give you many better options as per your investment goal and risk profile.

Investment with tax benefit sounds better and attractive. Tax saving mutual funds allows investors to save the tax under Section (80C) of the Indian IT Act 1961.

Tax Saving Mutual Funds

ELSS schemes based mutual funds with investment in the growth oriented equity generally offer tax benefits under section (80C) of IT Act. These tax saving funds are same as any other mutual funds, but the main attraction is that these funds are embedded with tax benefits. 

The main source of growth is the capital appreciation as far as these tax saving mutual funds are concerned. The stock market movements have a direct reflection of these schemes. The minimum three years of lock-in period is must for getting benefits from such investment.

ELSS (Equity ‘Linked’ Savings Scheme)

There are basically two types of ELSS fund falling into this category; (a) Dividend based (b) Growth based, where growth fund focuses on wealth creation and dividend scheme gives the benefit of income from dividend which can be reinvested as well. Both the schemes give wealth accumulation advantage to the investors.

Maximum INR 150,000 of the investment amount is eligible to have tax deductions annually under this scheme. Though investors are allowed to invest as much as they wish to but above this threshold amount, you will not get tax benefits.

What Is The Best Way To Invest In ELSS?

Both the options are open to investors either in SIP format or in lump sum amount. In case of SIP, as an investor, you have to keep in mind that each SIP is considered to be different and their lock-in periods would differ from each other. An investor can start SIP investment with minimum amount of INR 500. And one can easily estimate the expected return from the scheme by using a calculator.

Hypothetical Representation of Such Portfolio

As we know, these funds are made of up of different financial products including equity and debts, to diversify the risk, experts try to distribute the total pool of money in such a way that there should be less impact of overall market fluctuations. Let’s take an example of the same through graphical representation.


Sectors% Allotted to Securities(60% of total Pool)
Information Technology7.33
Health Care8.85
Consumer Discretionary5.33
Communication Services3.33
Consumer Staples4.12
Real Estate3.25

Advantages of Tax Saving Scheme

  • The fund is made up of many diverse products and hence, it is helpful to minimize the risk from fluctuation.
  • It can give you good returns in the long term if you choose to reinvest or not to withdraw before lock-In period.
  • These schemes are open-ended and investment can be done throughout the year.
  • If you don’t have in-depth market knowledge and still want to invest, then it is a right option because managers are experts and can handle things greatly.
  • These schemes are also good for those who cannot invest a big amount in one go. Hence, SIP can also be done.
  • Your future expense can be planned with these kinds of investment such as marriage expense, down payments for property etc.
  • You can start investing with just INR 500 per month.
  • You can save tax up to INR 150,000 per annum by investing in such scheme.


As an investor, one should always take decisions on his/her own financial goals, knowledge, and expected returns from the scheme. We have tried best to give you an overview of such funds, now you should go ahead with the option which is best for you as an investor. One should never take investment decision on market rumors or else. Hope you like this article. Please share with your friends and colleagues.