Should you invest in market linked tax saving products?

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 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.


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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