Should you invest in market linked tax saving products?
Investments are always a gamble, whether you
are putting your hard-earned money in traditional plans such as fixed deposits
(FD) and public provident fund (PPF) or new-age market-linked instruments.
Though FDs and PPFs are “safe”, they offer returns on fixed interest rates
ranging from 8% to 9.5% (as per the rates applicable at the time of investing),
often less than what you need to beat inflation. On the contrary, market-linked
instruments give you the liberty to overtake inflation and actually see your
money grow.
Investing your money in any
instrument, you need to know whether you are ready to take the risk. Let’s look
at the pros and cons of investing in market-linked products, such as ELSS,
pension funds offered under MFs and Unit-linked Pension Plans (ULPPs):
1. Greater returns: One
great advantage of market-linked investment products is the returns they offer.
Unlike traditional investments that offer a static interest rate of 8%-9% ,
ELSS, MFs and ULPPs offer returns as high 25%. Debt funds protect your money
when equity markets are not performing well, while equity funds ensure you get
higher returns than debt instruments when markets are up. As a result, you
benefit immensely.
2. Tax benefits: Similar to FDs and PPFs, ELSS
and pension funds offer tax savings. Investments up to Rs 1.5 lakh are eligible
for tax deduction under Section 80C of the Income Tax Act. In the case of ELSS,
dividends earned during the investment period are tax free. Further sale of
ELSS units are not subject to tax as they are considered long-term capital
gains.
3. Investment frequency:
These products give you the liberty of investing in lump sum or at periodic
intervals. This feature trumps FDs which require lump sum deposits. A
systematic investment takes advantage of market volatilities yielding positive
returns.
4. Lock-in period: ELSS has the shortest
lock-in period of 3 years while for ULPPs, it is 5 years. When you compare
these numbers with the lock-in periods of a tax-saving FD or a PPF, you get a clear
winner.
5. Fund managers: You don’t
need to be an expert on stock market and portfolio management for investing in
mutual funds or ELSS. The financial institution in whose scheme you have
invested has professional fund managers to handle your portfolio and ensure you
receive maximum gains. Therefore, you gain from a hassle-free, well-diversified
package of many individual investments, which you would otherwise find
complicated to manage on your own.
Cons:
1. Market exposure: As
these funds invest in the market, they expose you to its vulnerabilities as
well. So when you reap rich benefits of a strong market you also have to bear
the brunt of a sluggish economy. However, you can curtail your exposure by
balancing your investments in equity and debt funds.
2. Risks involved: The
returns generated from an MF and ULPP greatly depend on the performance of the
underlying scheme you have invested in. So, whether it is a debt fund for the
risk averse or equity for the risk-takers, both the options are definitely
fraught with some risk. However, if you stay invested for a long term (say 5
years or more), there’s actually very low risk and more returns than
traditional plans.
All in all, you should
invest in market-linked products but align that investment to your risk
appetite. If you think you are comfortable exposing yourself slightly to the
market’s fluctuation, I suggest you go for it. However, if you are wary or your
circumstances do not allow you to dabble with market-linked investments, I
suggest you stick to the safer and traditional savings plans.
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