The main advantage of mutual funds is the tax benefits that they offer. A saving account can accumulate a high amount of tax-deferred income and no matter what investment activities you choose to carry out, the tax saving schemes remain intact. But at times, you may find it difficult to save enough tax for you to cover the cost of investment activities. At such times, there are mutual funds that come with provision for tax saving schemes. This way, you can earn some money without paying too high taxes. There are also many other schemes that help you in tax saving.
One of such schemes is the lock-in period. In case you make a start-up investment in a mutual fund and do not keep up with the regular growth pattern, the plan allows for a lock-in period wherein you would be locked in to your initial performance level for a certain period of time. During the lock-in period, the annual income that accrues is tax free. If you want to withdraw from this scheme, then it would be a little bit difficult. But still, a considerable saving would be provided if you do not choose to withdraw earlier than the lock-in period.
Another scheme that is often associated with mutual funds is the dividend reinvestment plan or the deposit earnings plan. Under this scheme, the rate of interest on the cash deposits you have made is exempt from federal income tax. The exemption provided by section 80c only pertains to the first year of the policy. However, if you have maintained the same account for the last five years then all the earnings that have accrued during that period are subjected to the tax benefits. The dividends that are reinvested are not taxable as long as you are a citizen of the United States.
You can also invest through tax saving plans through mutual funds. These plans are designed to provide you with the advantage of tax exemption and thus enabling you to save money. When you invest in a mutual fund, you will be provided with a fixed rate of interest that is guaranteed. There are many companies that offer such funds; however, you should always compare the rates of these funds before investing.
Another scheme you can use is the universal investment plan or the buy-sell investment plan. Under this scheme, you can choose to invest both liquid and immovable assets. Under this scheme, you are not allowed to invest more than a prescribed amount, which is usually about ten thousand dollars. If you do not want to restrict yourself to a certain amount of money, then this scheme would not be the right choice for you.
You can save tax by making sure that all your investments are subject to tax laws. The best way to avoid paying taxes is to ensure that all your income and expenses are included in the financial records of your company. When you buy shares or mutual funds, they will usually ask you to furnish these documents. The information provided should be honest and accurate because it will help your company save tax money.