ASSIGNMENT 3
Q. Mr. X wants to invest in mutual funds and pension
funds for tax saving purposes. Explore the options
available in the market in which he can invest to reduce
his tax to minimum and get good return. What are the
types of schemes of mutual funds and pension funds
prevailing in India?
There are several options available for Mr. X to invest in mutual
funds and pension funds for the purpose of tax saving. These
investment options not only help in reducing tax liability but also
offer the potential for good returns. Here are some popular tax-saving
investment options in both mutual funds and pension funds in India:
1.Systematic Investment Plan (SIP): Mr. X can invest in
SIPs of equity or balanced mutual funds, which may not
provide immediate tax benefits but can generate long-term
wealth while being tax-efficient due to capital gains taxation.
2.Equity-Linked Saving Schemes (ELSS): ELSS funds
invest primarily in equities and offer tax benefits under
Section 80C of the Income Tax Act. Investments in ELSS
funds are eligible for a tax deduction of up to Rs. 1.5 lakh per
financial year. These funds come with a lock-in period of
three years
3.Debt Mutual Funds: Some debt mutual funds also offer
tax-saving benefits, such as Fixed Maturity Plans (FMPs) and
Tax-saving Fixed Deposits. These investments can provide
tax deductions under Section 80C. However, they typically
have longer lock-in periods compared to ELSS but can give
large amount of benefits to the investors ranging from good
returns to tax benefits as well.
4.National Pension System (NPS): NPS is a voluntary, long-
term retirement savings scheme that offers both tax-saving
and pension benefits. Contributions made to NPS are eligible
for a tax deduction of up to Rs. 1.5 lakh under Section 80C,
with an additional benefit of Rs. 50,000 under Section
80CCD(1B).
5.Atal Pension Yojana (APY): APY is a government
initiative for unorganized sector workers. Contributions to
APY are eligible for a tax deduction under Section 80CCD.
This scheme provides a fixed pension amount after
retirement.
6.Employee Provident Fund (EPF): If Mr. X is employed,
he can contribute to EPF, which is a government-backed
retirement savings scheme. EPF contributions are eligible for
a tax deduction under Section 80C, and the interest earned is
tax-free.
7.Public Provident Fund (PPF): PPF is a government-
backed savings scheme that offers tax benefits. Contributions
made to PPF are tax-deductible under Section 80C, and the
interest earned is tax-free. It has a lock-in period of 15 years.
Mutual funds and pension funds offer various types of
schemes to cater to different investor needs and financial
goals. There are various categories of mutual funds and
pensions available in the market which the investor can
choose depending on his preferences.
Here are some of the common types of mutual fund and
pension fund schemes available:
Types of Mutual Fund Schemes:
1.Equity Funds: These mutual funds primarily invest in
stocks or equities. They come in various subcategories, such
as large-cap funds, mid-cap funds, small-cap funds, and multi-
cap funds.
2.Debt Funds: Debt mutual funds invest in fixed-income
securities like government bonds, corporate bonds, and
debentures. They are generally considered less risky than
equity funds.
3.Hybrid Funds: Also known as balanced funds, these
schemes invest in a mix of equities and debt instruments to
provide a balanced portfolio with varying risk-reward profiles.
4.Index Funds: These funds aim to replicate the performance
of a specific stock market index, such as the Nifty 50 or the
Sensex. They are passively managed and have lower expense
ratios.
5.Exchange: Traded Funds (ETFs): ETFs are similar to index
funds but are traded on stock exchanges like individual stocks.
They offer diversification and are known for their liquidity.
6.Sectoral Funds: These funds focus on specific sectors or
themes, such as technology, healthcare, or infrastructure.
They offer investors exposure to a particular industry or trend.
7.Tax-Saving Equity Funds (ELSS): These are equity-linked
saving schemes that provide tax benefits under Section 80C of
the Income Tax Act. They have a lock-in period of three
years.
Types of Pension Fund Schemes:
1.National Pension System (NPS): The NPS offers different
schemes for subscribers, including Tier-I and Tier-II accounts.
It allows investors to choose between various asset classes,
including equities, corporate bonds, government securities,
and alternative assets.
2.Employee Provident Fund (EPF): The EPF is a
government-managed fund for salaried employees in India. It
primarily invests in fixed-income securities and provides
retirement benefits.
3.Public Provident Fund (PPF): While not a pension fund in
the traditional sense, the PPF is a long-term savings scheme
with a lock-in period of 15 years. It provides retirement and
tax-saving benefits.
4.Atal Pension Yojana (APY): APY is a government-backed
pension scheme for the unorganized sector. It offers a fixed
pension amount based on the contributions made by the
subscriber.
5.Employee Pension Scheme (EPS): This scheme is linked
to the EPF and provides pension benefits to employees who
are members of the EPF.
