Which is better for ELSS investment: SIP or Lumpsum?

First of all the decision has to be clear between ELSS Vs SIP. Equity Linked Savings Schemes (ELSS) is one of the various tax planning investment products eligible for deductions under Section 80C. Apart from investment value, dividend income and redemption proceeds are totally tax-free. While a Systematic Investment Plan (SIP) is an option to the traditional lump sum method of investment.

In this article, we will discuss a difference between ELSS Vs SIP.

What is ELSS?

ELSS funds are efficient investments to save tax and build wealth at the same time. ELSS is an equity mutual fund that allocates most of your invested capital in stocks of companies across industries and sizes. These funds come with a lock-in period of 3 years. It means you cannot redeem your fund units for 3 years from the date of allotment.

ELSS funds have gained popularity among the investors as an excellent wealth accumulation tool. Apart from having the shortest lock-in period, ELSS funds deliver the highest returns owing to large exposure to equity component in the fund portfolio.

You can invest in an ELSS scheme in 2 ways – either by investing a lump sum amount or via a systematic investment plan (SIP). While the lump sum route is a single payment mode, under the SIP mode of investing, a fixed amount is invested at fixed intervals of time which can be daily, monthly, quarterly or semi-annually in the mutual fund scheme of your choice.

Advantages Of Investing In ELSS

• The number one reason why ELSS schemes are very popular is that the returns are completely tax-free and you do not have to worry about paying long-term capital gains tax.
• Further, being equity-oriented funds, dividends declared under ELSS are tax-free
• Compared to other tax savings instruments as well as bank fixed deposits, the lock-in period of ELSS schemes is comparatively smaller and due to equity market exposure, it offers better returns.
• Given the lock-in structure in such schemes, fund managers are less concerned about the outflow that leads to better performance of such schemes.
• SIP or Systematic Investment Plans in ELSS bring in the discipline of investing and take away the risk of timing the markets.
•  You need not redeem after 3 years. You can continue in the scheme and benefit from long-term growth.

Disadvantages Of Investing In ELSS

• The portfolio construction of ELSS schemes is similar to that of any other equity diversified scheme. Therefore they are all exposed to market risks.
• Your investments are locked in for three years.
• Unlike other instruments such as PPF or bank fixed deposits that allow premature withdrawal subject to certain conditions, there are no such benefits in ELSS.

Most of the people get confused between ELSS and SIP. They think that both are investing plans, but ELSS is a tax-free investment and SIP or Lumpsum is the mode of payment. You have to decide how to invest, whether as a mode of SIP or Lumpsum.

What is SIP?

A Systematic Investment Plan (SIP), more popularly known as SIP, is a facility offered by mutual funds to the investors to invest in a disciplined manner. SIP facility allows an investor to invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme. The fixed amount of money can be as low as Rs. 500, while the pre-defined SIP intervals can be on a weekly/monthly/quarterly/semi-annually or annual basis. By taking the SIP route to investments, the investor invests in a time-bound manner without worrying about the market dynamics and stands to benefit in the long-term due to the average costing and power of compounding.

What Is a Lump-Sum?

Invest in ELSS Through Lump Sum or SIP?

• If you depend on regular monthly savings for your ELSS investments, it makes sense to invest through the systematic investment plan (SIP) route.
• Having sufficient funds for your tax-saving investments for the year in April itself, you should invest in a lump sum, unless you expect the market to be volatile or you expect a correction during the year.
• If you have the funds to invest but anticipate the market to be volatile, you should not keep your funds in a bank account.
• One thing investors should always avoid in volatile markets is trying to find the market bottom. Even expert investors fail to time the markets, more often than we would tend to believe. Systematic Investment Plans or Systematic Transfer Plans from debt fund to ELSS are the best way of investments in volatile markets.
• If you are salaried or have a predictable monthly income, the SIP mode of investment is the right choice for you. If you are a business owner and your income is seasonal, you can opt for a lump sum investment or a combination of lump sum and SIP, based on your monthly flow of money.

Advantages of SIP Over Lump Sum Investment

• Rupee-Cost Averaging: A SIP helps spread overtime during both rising and falling markets. Whereas with a lump sum investment, your money would buy fewer units of the mutual fund when markets are up and more units when they are down. Thus, a SIP enables you to lower the average cost of your investment and reduce the risk of your investment. This is known as rupee cost averaging.
• Power of Compounding: A SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding as you earn returns on the returns generated by your investment. This is known as the power of compounding.
• Less Stressful: A SIP investment is less stressful than a lump sum investment and may help you stay invested. Markets can be highly volatile and can induce you to withdraw your money in a panic if you have made a lump sum investment. This effect is less intense when you make an investment via a SIP because your money is spread out over time.

SIP Vs Lumpsum

ELSS Vs SIP

There is a huge difference between ELSS Vs SIP as they both are a totally different type of investments.

SIP or Lump-Sum – Which Will Give You Better Returns?

The answer to this question depends on the stock market conditions. During upward trends, the lump sum mode of mutual fund investment tends to give relatively higher returns whereas, during falling markets, investments made via a SIP generally provide better returns than a lump sum investment.

Let’s understand this better with the help of an example.

Investments Made During the Rising Market

If you would have made a lump sum investment of Rs. 12 lakh in ICICI Prudential Equity & Debt Fund during rising markets over say, from October 1, 2013, to September 1, 2014, and a monthly SIP of Rs. 1,00,000 in the same fund during the same period, the lump sum investment would have given you better returns.

If you would have made a lump sum investment of Rs. 12 lakh in ICICI Prudential Equity & Debt Fund during falling markets say, over say February 1, 2015, to January 1, 2016, and a monthly SIP of Rs. 1,00,000 in the same fund during the same period, the SIP investment would have given you better returns.

Investments Made During Declining Market

Conclusion

ELSS Vs SIP after covering all the point of differentiation we got to know that an ELSS is one of the best tax savings instruments available for investors today. To invest wisely, one should invest at the beginning of the year through the SIP route as it would yield the true benefits of investing. A SIP allows an investor to invest a fixed amount of money at regular intervals. It also gives the advantage of averaging the cost of units besides providing benefits of compounding. However, there may be situations when you would prefer to invest a lump sum. This short video helps you to understand both strategies better.

To clear the confusion between ELSS Vs SIP, you can visit our website WealthBucket. We offer various services like Equity Mutual Funds, Debt Mutual Funds, Balanced Mutual Funds or Income Funds. Moreover, you also give us a call at +91 8750005655, our experts are always present for your help. Also, you can email at contact@wealthbucket.in.

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