It holds no significance if you are looking to earn regular income or accumulating wealth over due course of time. On all counts tax saving mutual funds serves to be your best choice. Just you need to opt for a mutual fund that matches with your risk profile and investment horizon.
To get the ball rolling if you are risk averse you need to stick to debt related funds. Conversely if you are looking for higher returns and possess higher levels of risk tolerance then equity based funds are an apt choice. In addition if your investment horizon is small you should end up choosing debt related instruments. As per financial experts debt related instruments are ideal if your investment horizon is less than 5 years helping you to earn higher tax profit returns.
Any investment you make in debt related equipment for a time horizon of more than 3 years quality for long term capital gains to the tune of 20 % coupled with indexation benefit. Indexation will help you bring down the rate of return on taxes. For this reason investors end up choosing debt related instruments over tax deposits.
But at the same time it is really important to choose your debt related instruments as per your time horizon. In certain cases you can go on to choose overnight funds for parking your money for a few days. If your objective is to park your money for a few weeks, then liquid funds would be an apt choice. For a few months ultra – short term funds are a reliable choice. To park money for a few years short term funds serve to be a worthy option.
But if you are planning to invest for more than 5 years, then it is better to stick to equity related funds. Once again you need to choose a fund based on its risk profile. For example if you are a conservative investor you need to keep away from large cap schemes. For a moderate investor multi cap schemes would be a better option. For an aggressive investor they can choose a mid-cap scheme. For investors who have a large sum of money to play around they can park their money in international and sector oriented schemes.
Investors end up choosing options for dividends so as to receive regular income from their investments. But this does not work out to be a great strategy as mutual funds are required to disclose dividends from their mandate strategy. Once a scheme stops generating profits, an obvious fact is that they would stop to declare dividends.
In such cases it would be beneficial in sticking to a SIP. SWP, Demat is also an option, but it works in an opposite direction. Pretty much like a SIP that allows you to invest a fixed sum of money every month, SWP would allow you to withdraw a fixed sum of money from a mutual fund every month. But as an investor if you are planning to preserve the capital you need to be careful about the sum you withdraw.