MUTUAL fund, in its essential detail, is a pass-through vehicle through which an investor can invest in professionally managed portfolio of disparate asset classes.

Through this medium, an investor can invest in asset classes such as domestic equities, gilt, corporate bonds, money market instruments, gold, overseas equities. The choice of scheme is of course dependent on the investment objective, the time horizon and the risk profile of the investor.

Amongst the key benefits of investment in a mutual fund is the potential of high return, objective driven investment, professional portfolio management service, competitive investment costs, and potential tax benefits.

Mutual funds provide tax saving benefit in two principal ways. One is through the means of tax arbitrage, and other through deductions available under Section 80C for investment in the equity-linked savings scheme (ELSS).

The tax arbitrage, here, implies the different incidence of tax rates observed for largely similar risk-return portfolios of the mutual fund fixed maturity plans (FMPs) and the commensurate investment deposits.

For instance, if the FMP and the investment deposits are for a similar term period (of less than one year), and may have similar returns potential, yet, the incidence of actual tax rate may be different. Thus, the net yield on mutual fund FMP investment may be better than that of a deposit. A similar advantageous tax rate arbitrage is possible for FMP investments having an investment horizon of one year and more.

From a middle class professional's point of view, it is an ELSS investment that may provide a more effective tax-saving role. The investment in the ELSS not only provides the deduction from the gross taxable income (up to the extent of Rs 1,00,000), but it also has the potential of equity-generated returns. The investment under this scheme is locked-in for a period of three-years.

Other than that, nearly all the features and facilities for an ELSS investor are similar to that available in the diversified equity scheme. Thus, an investor can avail the SIP (systematic investment plan) facility to spread out the investment period over a long period of time, and may also utilise this to average the cost, reduce the tax incidence and garner competitive returns.

Moreover, the long-term return potential of equities provides an added advantage for an ELSS investor. The CAGR (compound annual growth rate) performance of Sensex in the 1980-2011 period has been around 16.64 per cent per annum. In other words, a one time hypothetical investment of Rs 10,000 in Sensex on January 1, 1980, would have grown to Rs 13,36,000 on November 30, 2011.

The investor can also utilise the SIP facility for investment in ELSS to not only plan tax savings, but can also build a long-term investment corpus. For example, an investor investing Rs 5,000 per month since January 1980 till November 2011 in Sensex would have invested a total of around Rs 19,10,000. But the value of his/her corpus would have expanded to Rs 4,03,00,000 by the end of November 2011. It is potency of this equity return profile, which gets augmented by the tax savings that makes ELSS an apropos medium of investment for the long term.