How to optimize your tax using mutual funds

It is a proven fact that mutual funds are one of the most tax efficient investment vehicles but to benefit from that potential it is very important for you to select the right fund. So, therefore make sure that while you are investing couple of factors are considered one, always invest for the long term and the reason for that is that there are whole lot of benefits tax benefits when you invest for the long term. For example if you are investing in equity funds there are no long term capital gains tax.

What is a long term capital gain? Any investment that is redeemed after completion of 12 months is treated as a long term gain. So, imagine any gains that you make from an equity fund is tax free.

As far as the short term gains are concerned you have to pay a fixed rate of tax of 15 percent. So, as I mentioned earlier, one, as an asset class it requires a long term commitment. Two, even in terms of tax efficiency it makes sense to invest for the long term. If you look at the debt funds the short term capital gains are taxed at your nominal rate but the long term capital gains are taxed at a concessional rate of 10 percent. So, there again as you can see when you invest for a long term you actually tend to benefit a lot. So, always invest for the long term.

Second important thing is how you can optimize your tax by choosing the right option. Every mutual fund scheme offers different options, like there is a growth option, there is a dividend option, there is a reinvestment option. If you are investing for the long term always go for growth option. Dividend reinvestment is not the right option. The reason for that is that every time the dividend is paid to you that is reinvested and then again the lock-in period of one year or the completion of that period begins again. The dividend should be taken only incase you actually require a regular income to come in. So, choose the right option, invest for the long term, it can make a significant difference to the post tax return that you make from mutual funds.   

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