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.