It has been quite a ride for mutual fund investors over the last few months. Equity markets looked poised to touch record highs, lost steam and subsequently came back strongly -- all in a span of less than 3 months.

On the other hand, options available to investors have burgeoned thanks to the incessant launch of mutual fund initial public offerings. From the investors' perspective, it's a baffling time both in terms of the choices available to them and the direction where markets are headed.

Tax-saving funds (also referred to as equity-linked savings schemes) is an option which best fits the bill in the present scenario.

In the new tax regime (under Section 80C), investments in tax-saving funds are eligible for deductions subject to an upper limit of Rs 100,000 (as opposed to just Rs 10,000 earlier). Investors with an appetite for high-risk investment avenues no longer have to turn to assured return instruments like Public Provident Fund or National Savings Certificate for their tax planning needs.

While most would agree that equity investing should always be carried out with the long-term (3-5 years) perspective, few instruments actually propagate this cause. Tax-saving funds' mandatory lock-in period helps the investors' cause on this front. The 3-year lock-in period introduces an element of much-needed discipline in the investment process.

Another area where tax-saving funds impress is the returns. Powered by the presence of equities, tax-saving funds are equipped to match their counterparts from the diversified equity funds segment.

As can be seen from the table above, tax-saving funds have delivered impressive performances over the 3-Yr period (which is the ideal time frame to evaluate them considering the lock-in period).

However, investors would do well to note that tax-saving funds are high risk propositions like diversified equity funds and could expose investors to commensurate risk levels.

It is imperative for investors to adhere to their risk appetites while making investment decisions at all times and the lure of attractive returns certainly doesn't qualify as a good enough reason for investing in tax-saving funds.

How can investors maximise the benefit of investing in tax-saving funds -- the solution lies in the Systematic Investment Plan (SIP) route. While most investors are conventionally habituated to making tax-saving investments towards the end of the financial year, the same approach should not be used while investing in tax-saving funds.

Investing using the SIP route can enable investors to benefit from rupee-cost averaging and make market timing irrelevant. Further, the SIP route will ensure that the investment is far lighter on the investors' wallet vis-�-vis a lump sum one.

Whether your objective is to invest from a tax-saving perspective or otherwise, tax-saving funds make the grade in either case. Our advice to investors -- assess your risk appetite and get invested now!

Money Simplified - The definitive guide to Mutual Funds. Get your FREE copy now! Click here