What are ELSS and SIP in Mutual Fund Investments?
Have you come across the terms ELSS and SIP? Well, these are some popular terms in mutual fund investment. And if you are heading towards an investment journey or just learning about them, there is a key difference you should know first. ELSS (Equity Linked Savings Scheme) is a type of tax-saving equity fund, whereas SIP (Systematic Investment Plan) is the mode of investment.
Being the most common terms in mutual funds, investors tend to compare SIP and ELSS. However, their actual definitions reveal that these two are not comparable.
In the below sections, we are going to explore the fundamentals of ELSS and SIP. This way, you can make an informed decision for your mutual fund investments.
What is ELSS?
ELSS is a tax-saving mutual fund investment. Under this equity investment option, you have the option to claim a tax deduction under Section 80C of the Income Tax Act.
In comparison to any other tax-saving investment, ELSS has the shortest lock-in period of three years. Moreover, you can gain profit from the market volatility as in ELSS 80% of investments are parked in stocks.
So, tax benefits are combined with wealth growth to make your investments beneficial for long-term financial planning.
What is SIP?
SIP is a way of investing in mutual funds. In this method, investors are allowed to invest small amounts at their chosen intervals. And SIP can be done daily, weekly, monthly, and quarterly.
While investors choose the SIP amount, you should know that it cannot be less than the minimum investment amount (₹500-1,000). The minimum investment amount may vary as per your chosen fund.
With SIP you get the comfort and convenience as you don't need a large sum for investing in mutual funds. Moreover, you have an investment schedule, just choose the intervals through standing instructions.
ELSS vs SIP: Understanding the Key Differences.
ELSS and SIP are such terms that you'll come across while making investment choices. But before you use them, do know how these terms differ from each other.
Change in Investment
You may want to consider reallocating your investments to different funds if you anticipate market changes in the coming months. In ELSS, you cannot access your investment before the three-year lock-in period. However, it is simple to change your SIP investments if you have not made any ELSS investments. For this reason, you can use SIP to switch from equity funds to debt funds and vice versa during periods of market volatility.
Growth Prospective
SIP is not an investment fund in itself, it allows you to do regular investments into multiple mutual funds. On the other hand, we have ELSS which offers tax benefits but limits liquidity because of its lock-in period. Because of this, you should consult your financial advisor and invest part of your portfolio in equity funds for robust capital growth and part in debt funds for consistent growth and capital protection.
Lock-in time frame
A 3-year lock-in period is a requirement for ELSS mutual funds. Whereas SIPs allow you to choose your tenure. In terms of lock-in period, SIP is more flexible in comparison to ELSS. If you choose a short lock-in period by opting for a mutual fund SIP, you won't be eligible for tax benefits.
Tax Benefits
ELSS mutual funds are known for their tax benefits. These mutual funds can save you up to ₹1.5 Lakh per annum. This deduction can be claimed under Section 80C of the Income Tax Act. On the other hand, you can get tax benefits on SIP if you have ELSS funds in your portfolio.
Rupee Cost Averaging
SIPs enable investors to average their purchase price by investing a set amount on a regular basis, thereby reducing the impact of market fluctuations. Additionally, this allows you to possibly purchase additional units at a time when the net asset value (NAV) is lower. This benefit is also available to ELSS funds if you've invested in it via SIPs.
Conclusion
There is no way to compare ELSS and SIP; they are two different concepts that function well together. Using SIPs to invest in ELSS is a practical way to save taxes. SIPs encourage systematic saving and, by rupee cost averaging, may improve returns on ELSS funds. By carefully integrating the two approaches, you may maximise your investment benefits.
FAQs
What is the best course of action for ELSS: lumpsum or SIP?
Consider your risk tolerance, investment horizon, and financial goals when choosing between lumpsum or SIP.
How to check if my SIP is in an ELSS fund?
Look at your investment statement or INDmoney account.
Should I invest using SIP?
SIPs offer several benefits, such as regular savings and investments. However, SIPs might not be ideal if you have a large sum to invest immediately and aim to capitalise on a potential market upswing.
Does my ELSS have a lock-in period?
Yes, all ELSS investments, regardless of whether done as a lump sum or SIP, have a minimum lock-in period of 3 years from the date of investment. This means you cannot redeem your investment amount before the lock-in period ends.