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Save Tax With Mutual Funds

In the story about the ant and the grasshopper, the ant was considered smart because he saved all his sugar for a rainy day, while the grasshopper paid the price for squandering away his time. Unfortunately even amongst the most diligent of us humans, whether your personality is like the ant's or grasshopper's, if you are earning an income, you're going to have to save a portion of it for the state as tax. This can get rather, taxing over the long run, so it's always good to look for ways to park your funds in order to get a tax break. One of the easiest and safest methods is with mutual funds. A mutual fund is an investment product created by a fund company. Investors buy units or shares of a fund and the money collected goes into buying securities. There are various kinds of mutual funds like stock, equity, bond and hybrid funds based on what it is invested in. A fund has a net asset value or NAV which is the rate of a unit share of the mutual fund in the market. Investors generally pay a premium amount at regular intervals till the term of the fund matures. When the return of it is higher than the amount it was bought at, this is referred to as the capital gain which is usually taxed in investments.

Usually capital gains are what are taxable for investors. However with it, there are exceptions. A short-term debt fund that is redeemed within a year is taxable. However if held for longer than a year, the capital gains tax is significantly reduced. Similarly, an equity fund held for more than a year, the tax is seriously reduced and in some cases may be negligible. On the other hand, dividends from both equity and debt funds are bereft of taxation.

Some things to look out for when you want to make sure you're investing in a tax saving fund is to look at the kind of fund you are investing in ie whether it's equity or debt, the term you plan to hold the fund ie short -term or more than a year, whether the income is dividend or capital gains. Some capital gains may be reinvested to save on tax, so make sure to check on this. It's worthwhile to do some research on the top mutual funds to invest in and have a look into the fine print. The tax benefits will usually be mentioned so make sure to compare them to arrive at what suits you best.

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