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Tax Saving Funds

Sandeep Jain wants to know if there’s any harm in investing only in tax saving plans. Here’s what we think

Is there any harm in investing only in tax saving plans like HDFC Tax Saver and Magnum Tax Gain that are five star rated by Value Research? I am 40 years old and want to invest more in diversified equity mutual funds. I have investments in Franklin Prima, HDFC Prudence and Franklin Flexi Cap. What should be my strategy?
—Sandeep Jain

Why would you invest in tax saving mutual funds when you are not required to save taxes? The only difference between tax and non tax saving equity funds is the lock-in period. Though there is no harm if you invest in tax saving funds, non tax saving mutual funds provide you more liquidity as you can redeem them as and when required. This also gives you the flexibility to exit from a fund if it does not perform well over 1-2 years. You cannot do this in a tax saving fund due to the compulsory lock-in. There are various five star rated equity mutual funds available to choose from. Funds that you currently invested in like HDFC Prudence and Fanklin India Flexi Cap have also been consistent performers over the years. While investing your money, try to spread your investment over time and create a balanced portfolio with the right equity debt allocation according to your risk appetite.

Avoid tracking the performance of your mutual funds on a daily basis. Check your equity-debt allocation and rebalance it once every year.

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