Mutual Fund investments are a great instrument for tax planning which also ensures good returns. In Mutual Funds, a major portion is invested in equity and equity-related instruments. Investment up to Rs 1 lakhs is exempted from income under section 80C and dividends received are also tax-free in the hands of the investor. There is no upper limit on investments and long-term capital appreciations are tax free. The only limitations of Mutual Funds is that there is a lock in of three years before which you can not withdraw. But investment should be carefully planned and you should devote sufficient time in selecting the right fund.

There is no income to the investor during the tenure of the investment. He will get a lump sum amount at the time of redemption or on maturity. In addition to this, investor gets a dividend from the fund house. There are two options available to the investor:

  • He can cash in the dividends.
  • He can opt for dividend re-investment option.

The most important factor in Mutual Fund investment is the choice of right fund. Check out whether the fund has good performance. Here are some benchmarks to be followed while selecting a Mutual Fund for investment. A good track record is no guarantee for future performance. You should also look at some quantitative measures to evaluate which fund is good for you. Expense Ratio which denotes the annual expenses of the funds, including the management fee, and administrative cost should be low. Higher Sharpe Ratio is better which indicates whether an investment’s return is due to smart investing decisions or a result of excess risk. Alpha Ratio which measures risk relative to the market should be positive. The mutual fund should have a balance in R-square and ideally it should not be more than 90 and less than 80. Final choice depends upon your risk profile and priorities. You should take an investment decision based on overall financial planning.

Here is a list of top five Mutual Funds for the year 2010.

  1. HDFC Tax saver
  2. Taurus Tax shield
  3. Canara Roboco Tax Saver
  4. Sahara Tax Gain
  5. Reliance Tax Saver

Source by Rita Jain