Mutual Fund Investment 101

That’s why rebalancing your equity ratio when planning retirement is essential. In this article, we discuss how you can rebalance your equity ratio when planning retirement and why doing so is critical. 

Equity Ratio in Retirement Planning: What Is the General Understanding

The principal of age-based asset allocation is key when thinking of your retirement investment plan. But what does this mean? It simply means becoming more conservative with your equity exposure as you age and near your retirement. 

Many financial experts recommend using this formula for equity allocations when retirement planning:

100 - Your Age = % of Equity Exposure in Your Portfolio

So, 

• If you are 40, your equity exposure should ideally be 100-40 = 60% as per this rule.

• If you are 55, your equity exposure should ideally be 100-55 = 45% as per this rule. 

But here’s the thing, you don’t have to stick to this guideline, primarily because it only takes age into account and fails to consider factors like:

• When you want to retire

• Debt levels

• Health condition

• Income sources

• Dependents

So, a good approach may be to use this as a starting point and then tweak the equity ratio as per your unique needs for retirement planning.

Why Is Rebalancing Your Equity Ratio for Retirement Planning Important?

Your asset allocation strategies start shifting from growth to income as your near retirement. Your equity exposure needs to reflect this. 

Here’s why rebalancing your equity ratio is a critical part of financial planning for retirement:

• As retirement nears, focus shifts from wealth building to steady income.

• Rebalancing for relatively safer, fixed-income retirement options may help contribute to capital preservation.

• Reducing equity exposure can help lower the Equity Market risk in your portfolio.

A more conservative approach may be better to avoid sudden shocks near/in retirement.

How Can You Rebalance Your Equity Ratio for Retirement Planning?

By now, you must understand why rebalancing equity exposure is key to retirement planning, especially if you don’t want to worry about sudden market shifts close to retirement. 
 

But how do you go about integrating this rebalancing in your retirement plan? Here’s how:
 

Step 1: Define Your Target Equity Allocation For Each Life Stage

When you start retirement planning, make sure to define what’s your target equity allocation for each stage of investing. You can decide on this by evaluating:

• Your age

• Years left until retirement 

• Your retirement income needs

• Your risk tolerance
   

For instance (for illustration purposes only):

• At 40, you may choose to invest 70% in equities and 30% in fixed-income assets due to a longer investment horizon.

• At 50, you may be comfortable with a 50%-50% allocation between debt and equities.

• At 60, you may prefer 30% allocation in equities and 70% in debt.
   

This can become the foundation of your equity rebalancing guide for all of the future retirement planning years. Always remember that there is no ‘Correct Ratio’ as such, but only the one that suits you.

Step 2: Review the Current Equity Ratio in Your Portfolio 

How will you know if your equity exposure is in-line with the target allocation mentioned in your retirement plan? You have to review your current equity ratio and see how your equity mix compares to the target allocation you identified for your age using Step 1. 

Let’s say your ideal target equity to debt ratio at 40 (calculated in Step 1) was 70:30. But due to a equity rally last year, your portfolio now stands at:

• 80% equity

• 20% debt

This means equities are overweight by 10%, while debt investments are underweight by 10% vis-a-vis your retirement plan.

Use retirement calculator to plan your retirement with Tata Mutual Fund
 

Step 3: Reallocate Funds to Rebalance the Mix 

If you notice that your portfolio has drifted away from the target equity ratio, you have to reallocate funds to restore balance into your retirement planning process. This can be done in the following ways:

Sell What’s Overweight

Sell equities if their allocation has become larger than the target allocation as per your retirement investment plan. So, if your target equity allocation at 55 was 50% and currently equities make up 70% of your portfolio, selling may help you:

• Lock-in gains

• Reduce excess risks

• Make sure that the equity ratio is back to the intended level

Buy What’s Underweight 

Use the funds from equity sales to buy more of fixed-income assets that are currently below the target allocation. 

So, let’s say if debt allocations were supposed to be at 50% as per your retirement investment plan when you’re 50, but currently stand at 30%, you may consider making fresh investments. This may help you:

• Restore balance in your portfolio

• Strengthen the underweight asset class

 

Some Tips for Rebalancing Your Equity Ratio For Retirement Planning

 

• Review your equity ratio annually: Reviewing your equity ratio once annually helps you understand if it’s well-aligned with your target levels. It also helps you take steps to correct major misalignments which may result from market rallies or slowdowns.
   

• Rebalance if it shifts from the intended levels: A good rule of thumb for rebalancing may be a 5%-7% shift. This means, you may consider rebalancing the equity ratio in your portfolio if it shifts 5%-7% from your intended allocation for that age as per your retirement planning map. Again, this percentage can vary depending on person based on his / her personal choice & requirements.

Tax Saving Mutual Funds, is known as ELSS (Equity Linked Savings Scheme), are financial products that allow investors to save tax while investing in the stock market. These funds qualify for tax deduction under Section 80C, Income Tax Act, 1961. 

When you invest in an ELSS fund, the amount you invest (up to ₹1.5 lakh in a financial year) can be deducted from your taxable income. This reduces the tax you need to pay. However, after the latest amendments introduced by the Union Budget 2025, the ELSS scheme tax benefit can be availed of only when you file your Income Tax Return (ITR) under the old regime. 

So, are you looking to invest? Read this article to learn what ELSS mutual funds are and how you can pick the right scheme as per your risk tolerance.

What are ELSS Mutual Funds?

As per SEBI rules, an equity-linked savings scheme must invest at least 80% of its total assets in equity and equity-related instruments [in accordance with the provisions of the Equity Linked Saving Scheme (ELSS), 2005, notified by the Ministry of Finance]. 

The remaining (up to 20%) of the fund’s assets may be invested in other instruments such as debt or money market instruments, depending on the fund manager’s strategy.

The Mandatory Lock-in Period and Tax Benefit

Every investment made in an ELSS fund has a statutory lock-in period of three years. This means each investment amount must stay invested for three years before it can be redeemed. After the three-year lock-in, any profit you make is treated as Long Term Capital Gain (LTCG). If the total gain in a year is more than ₹1.25 lakh, it is taxed at 12.5% + cess. 

Furthermore, all the investments made in an ELSS fund qualify for tax deduction under Section 80C, subject to the overall limit of ₹1.5 lakh under old tax regime. 

How to Can You Pick the Right ELSS Mutual Fund in 2026? The 4-Step Approach!

The selection of the right ELSS tax saver fund depends on aligning the:

• Fund’s risk level

• Portfolio structure, and

• Investment style with your own “risk tolerance.”
   

That’s because not all ELSS funds behave the same way (even though they follow the same tax rules). Each fund differs in terms of portfolio construction, market-cap exposure, and level of volatility.

Let’s see how you can make a disciplined selection based on your risk profile following this four-step approach:
 

Step 1: Understand Your Risk Profile

Your risk profile reflects how much market fluctuation you can tolerate and how long you can stay invested. Generally, investors are divided into these three types (check where you belong):
 

Always remember that since ELSS funds invest at least 80% in equities, they are very high risk products. If you find yourself a conservative investor, you may approach ELSS carefully or instead prefer other tax-saving products.

Step 2: Match ELSS Fund Style With Your Risk Profile

Once you understand your risk profile, the next step is to translate that self-assessment into “actual fund selection”. As an investor, you may try to match the style of an ELSS fund with your risk profile. 

This matching is important because ELSS investments cannot be withdrawn for three years, so the fund you choose should suit both your risk tolerance and your time horizon.

Step 3: Evaluate the Fund’s Track Record

When selecting an ELSS fund, you may not judge it only by its “recent performance”. Reason? Short-term returns can be influenced by temporary market conditions and may not reflect the fund’s true quality.

Therefore, you may also make the following checks:

Step 4: Review the Fund Manager and Risk Metrics

The fund manager is the person responsible for deciding which stocks the ELSS fund invests in. Their experience + track record are highly important. A skilled manager is more likely to make better investment decisions, particularly during volatile markets.

Next, while evaluating an ELSS fund, try to understand how much risk you are taking. This assessment can be done by looking at the following four metrics:

Quote

Understanding Long-Term and Short-Term Capital Gains Tax on Mutual Funds

Conclusion

Till now, you must have understood that ELSS is a tax-saving option with a mandatory 3-year lock-in period. Investments made in this fund are eligible for deduction under Section 80C up to ₹1.5 lakh under the old regime.

However, since all ELSS funds differ in terms of risk profiles + portfolio composition, it is important to match a fund’s risk with your own risk tolerance before committing your money. This can be done by:
 

• Reviewing long-term fund performance history

• Checking fund behaviour during market corrections

• Understanding the fund manager’s strategy

• Evaluating volatility using the Sharpe ratio and Beta

• Comparing returns with the “benchmark” and “category average.”

Disclaimer:

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.

• ELSS funds have to invest at least 80% of their assets into equity and equity-linked instruments. (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance).

• You can claim an annual deduction of up to Rs. 1.5 Lakhs on the invested principal as ELSS mutual fund tax benefits under the old tax regime.

• ELSS funds come with a 3-year lock-in window during which you cannot withdraw your investment.

7 Common Mistakes to Avoid When Investing in ELSS Funds

1. Ignoring the 3-Year Lock-in Period

You might be aware of the mandatory 3-year lock-in window of an ELSS fund, which is also the shortest among all tax-saving 80C instruments. But there’s more to this lock-in period:
 

• If you invest via SIPs, the 3-year lock-in is applicable to each SIP installment separately. 

• So, if you invest Rs. 5,000 in January, this amount stays locked until January 3 years later and so on. 

• This means, you won’t be able to withdraw the entire corpus after the completion of 3 years from your 1st SIP Installment. 
   

Solution: Consider planning your ELSS fund investments to line-up with your future milestones to avoid liquidity issues. You may also consider a lump-sum approach if you anticipate needing the corpus after 3 years. 

2. Investing in Multiple ELSS Funds

Another common mistake investors make with ELSS funds is investing in multiple schemes from different AMCs. This can create issues for your portfolio because:
 

• Investing in multiple ELSS funds may dilute the diversification of your portfolio since many funds may invest in the same underlying stocks. This can increase portfolio risks and compromise potential returns.

• When it comes to ELSS fund tax benefits, you can only claim up to Rs. 1.5 Lakhs in a financial year (cumulative under the 80C limit under old tax regime. So, investing in multiple ELSS funds will not give you extra benefits. 
   

Solution: Do your research well and stick to one ELSS fund instead of adding multiple schemes from different AMCs. 

3. Investing Only Rs. 1.5 Lakhs into the Fund

There is a very common misconception among investors that you can invest only up to Rs. 1.5 Lakhs into an ELSS fund. In reality:
 

• There is no upper limit to how much you can invest in an ELSS fund.

• You can only claim deductions of up to Rs. 1.5 Lakh on the principal sum under the old tax regime, regardless of how much you invest in the fund.
   

Solution: Don’t think that you have to restrict yourself to the Rs. 1.5 Lakh limit. Plan your investment based on your risk appetite, goals, and time horizon.

4. Not Understanding the Tax Benefits of ELSS Funds Clearly

Tax benefits of ELSS funds include deductions of up to Rs. 1.5 Lakhs - this is common knowledge. But that’s not all. Investors often forget that:
 

• This tax benefit of ELSS fund is applicable under the broader 80C limit under old tax regime.

• It is applied in combination to any other 80C tax-saving investment you have.

• Only the principal invested qualifies for tax deductions, not your returns.

• The 80C tax benefit is only applicable under the old tax regime.
   

Solution: If you already have 80C investments, see if there’s actually any room left within the umbrella deduction limit of the section before investing in ELSS funds (if you’re investing primarily for tax benefits). Also consider if you’re filing taxes under the new or old regime. If it’s the new regime, 80C benefits won’t apply. 

5. Redeeming Investments After 3 Years

Another common mistakes investors make when investing in ELSS funds. Most people think that they need to redeem their investment once the 3-year lock-in window is over. What they don’t understand is that:
 

• ELSS funds do become redeemable after 3 years, but it doesn’t mean you have to withdraw your investment once the lock-in is over. 

• Redeeming without considering market conditions and future potential can possibly disrupt their potential wealth creation journey. 
   

Solution: You may treat the lock-in period as the minimum investment window, rather than a fixed exit point. You may use the 3-year limit as a check point to reevaluate your investment in ELSS fund’s, overall performance, and your financial goals to make informed withdrawal decisions. 

6. Failing to Consider Investment Risk

Many investors only consider the tax benefits of ELSS funds. They fail to understand that ELSS funds are equity-oriented mutual fund schemes, which means they typically carry very high risk than debt-oriented and hybrid funds. This leads to:

Investing in ELSS funds without considering your risk appetite.

• Investing more than what your risk tolerance can handle.

• Failing to understand how ELSS funds are subject to market volatility.

• Having misaligned expectations about ELSS fund potential returns.
   

Solution: Instead of treating an ELSS fund as a tax-saving investment, look at it as an equity-oriented mutual fund with tax benefits. This way, you will be more likely to consider your risk appetite and invest within your risk tolerance limits. 

7. Focusing Only on Past ELSS Fund Returns

Many investors simply invest in recommended ELSS funds or choose funds solely based on the past returns of ELSS funds. They fail to analyse and compare ELSS funds on the basis of:
 

• Expense ratio

• Portfolio composition

• Investment strategy

• Fund manager expertise 
   

Solution: Look beyond the past returns of ELSS funds. Compare the performance of the fund with its benchmark and check if it aligns with your goals and risk appetite.

(Note : Past performance may or may not be sustained in the future.)

ELSS Mutual Funds vs. Traditional Tax Saving: Which Should You Choose?

 

Conclusion

If you’re considering investing in ELSS mutual funds for tax benefits, avoiding a few common mistakes can help you make better investment decisions. Things like failing to understand the lock-in clause, how the tax benefits of ELSS funds actually work, and even the risk associated with these funds can be a problem.

Understanding all these common mistakes can help you formulate a clear investment strategy for ELSS funds to both optimise tax benefits and long-term potential wealth creation. 

 

Disclaimer:

• An Investor Education and Awareness Initiative by Tata Mutual Fund. 

• To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh

• Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’

• All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login

• Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process. 

• This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.

 

Now, it must be noted that the capital gain tax on long-term capital gain is 12.5%.

Additionally, for assets being an equity shares in a company, a unit of an equity oriented mutual fund and a unit of a business trust, there is an exemption limit of up to ₹1.25 lakh in a financial year. Only the LTCG amount exceeding ₹1.25 lakh is taxed at 12.5%.

For example, let’s say your LTCG from equity oriented mutual funds is ₹2,00,000. Now, ₹1,25,000 is not taxed, whereas the remaining ₹75,000 is to be taxed at 12.5%. 

How the 12.5% Tax Rate can be used as an advantage in 2026?

The 12.5% LTCG tax rate is not just a lower number! Its advantage comes from:
 

• How it is applied

• What it replaces

• What additional relief comes with it

Let’s understand two different scenarios where you can use the 12.5% LTCG rate to your advantage:
 

Case I: Gains from Debt Mutual Funds are Treated as FD Income

As per the current tax rules, debt mutual funds (having at least 65% exposure in debt and money market instruments and acquired on or after 1 April 2023) do not have LTCG treatment. All the gains are:

• Classified as short-term capital gains (STCG) and

• Charged at the investor’s income tax slab rate. 
   

Now, the holding period has no impact on tax, and any exemption limit or indexation benefit does not exist. Means? If you hold such debt fund for 1 year or 10 years, the gains will always be taxed at the applicable slab rates. After the latest changes, the tax system does not reward time or patience in such debt funds.

Further, capital gain arising on transfer of units of mutual funds (other than equity oriented mutual funds and specified debt mutual funds as defined under section 50AA of the Income-tax Act, 1961) are to be taxed at the rate of 12.5% (without indexation) provided that units are held for more than 24 months. Short term capital arising on transfer of units of such funds is to be taxed at applicable income-tax slab rates.

How to Benefit from the 12.5% LTCG Rate?

From a taxation point of view, instead of aforesaid debt mutual funds, you may prefer equity schemes which are generally very high risk instrument (as per your risk appetite). If they are held for more than 12 months, you can enjoy the following two major advantages:

For More Clarity, Let’s Study An Example theoretically:

Let’s assume an investor, Mr. A, pays tax in the highest tax bracket of 30%. In the current financial year, he earned a capital gain of ₹3,00,000 from selling units of debt mutual funds (having at least 65% exposure in debt and money market instruments). Mr. A has acquired these units of debt mutual funds on or after 1 April 2023 and held for a long term, say 10 years.

Now, these gains will be taxed at Mr A’s applicable slab rate of 30%. The final tax liability would be ₹90,000 + applicable surcharge and health and education cess.

In contrast, if Mr. A had invested in equity-oriented schemes, the LTCG of ₹3,00,000 would have been taxed as follows:
 

• The first ₹1,25,000 would be exempt. Only the remaining ₹1,75,000 (₹3,00,000 - ₹1,25,000) to be taxable @ 12.5%.

• The tax liability would be ₹21,875 (₹1,75,000 x 12.5%) + applicable surcharge and health and education cess.

The tax efficiency? You can save up to ₹68,125 (₹90,000 - ₹21,875) + applicable surcharge and health and education cess, just by switching the mutual fund type (from specified debt mutual fund to equity oriented mutual fund). To avoid manual calculations and get precise answers, you may also use the online LTCG tax calculators. 

Case II: Invest For the Long-Term Investment Horizon 

It is worth mentioning that equity oriented mutual funds still follow a “time-based tax split”. Let’s check the latest long-term capital gains tax brackets below:

As an investor, if you sell your equity oriented mutual fund units before 12 months, it might attract a higher tax liability. Whereas, holding longer attracts lower tax + lets you avail of an exemption. To use the 12.5% LTCG rate to your advantage, you may prefer delaying your exit beyond 12 months.
 

Let’s see through an example how this timing difference could let you save more tax.

Example

Assume that the capital gain is ₹5,00,000. Now, if you sell your units before 12 months (STCG), these gains would be taxed @ 20%. The liability would be ₹1,00,000 (₹1,00,000 x 20%) + applicable surcharge and health and education cess.

In contrast, if you sell after 12 months (LTCG), the first ₹1,25,000 will be exempt. Only the balance ₹3,75,000 (₹5,00,000 - ₹1,25,000) will be taxed @12.5%. The tax liability would be ₹46,875 (₹3,75,000 x 12.5%) + applicable surcharge and health and education cess. 

If we compare the “net capital gain retained”, you held ₹4,53,125 in the case of LTCG and only ₹4,00,000 in the case of STCG. The additional gain retained by merely waiting is ₹53,125. Due to time difference.

Conclusion

So now you know how to use the 12.5% LTCG rate to your advantage. After the income tax changes, gains realised from specified debt mutual funds are treated similarly to “fixed deposit income”. They are 100% taxable at the investor’s income tax slab rate (irrespective of the holding period). This rate can go up to 30%, which significantly increases the tax burden even for long-term debt investors.

In contrast, LTCG from equity oriented mutual funds is taxed at a flat 12.5%, along with an annual exemption of ₹1.25 lakh. This can result in a substantially lower tax liability on the same amount of gains.

Additionally, tax efficiency improves further when equity investments are held for the long term. By staying invested beyond 12 months, you can shift from a 20% STCG tax to the lower LTCG rate of 12.5% with an exemption. Want to estimate your tax impact accurately? You can even use an online LTCG calculator and plan your redemptions accordingly.

Disclaimer

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.