Equity-linked savings schemes (ELSS) are tax-saving mutual fund schemes that invest primarily in equities and equity-related products. These funds offer the opportunity to reduce your tax liability through deductions of up to Rs 1.5 lakhs under Section 80C of Income Tax Act while also generating returns from the investment markets. When investing in ELSS, you can put in a lump sum amount or invest via the SIP (systematic investment plan) route.
A lump sum is a single, large investment that an investor puts into a fund at once, while the SIP route involves investing in small amounts over regular intervals (weekly, monthly or quarterly). Once you have set up your account, you can even enable automatic deduction from your bank account on pre-set dates and invest in the scheme.
So, which investment approach is right for you? Here is a detailed look at both these methods to help you better determine which investment option may work for you.
Lump sum vs SIP in ELSS – Comparison
- Risk appetite
An SIP has the potential to offer capital protection since you are investing a small portion of your total investment regularly. For example, if you are planning to invest Rs. 1.5 lakh in ELSS mutual funds through an SIP to avail 80C income tax benefits, you would need to invest only Rs. 12,500 monthly. This spreads your risk in volatile markets. When you were to invest Rs. 1.5 lakh in a lump sum, you would expose your entire investment at a time.
- Returns
Investing a lump sum in ELSS funds entails higher risks but also carries the potential for higher returns if the markets are favourable. Such an investment must only be made after carefully considering the current market conditions and appropriately timing the entry and exit.
If markets suddenly turn bearish, you could potentially lose out on returns or incur losses on your ELSS mutual fund investment. Additionally, if you invest a lump sum during periods of high volatility, you could end up overpaying for units since prices tend to be higher during these times.
Risk-return trade-offs also apply to SIPs, but they let you invest across different market cycles, thus averaging the impact of market dynamics over time.
- Lock-in period
ELSS mutual funds come with a compulsory 3-year lock-in period. If you invest in ELSS online with a lump sum, you can redeem the funds after three years (from the investment date). For an SIP in ELSS, a three-year lock-in period is applicable to each instalment. This means after three years, only the first instalment would be eligible for withdrawal, while other instalments would need to complete the full term of 36 months before you can benefit from them.
Lumpsum or SIP in ELSS – The bottom line
Investing a lump sum allows you to take advantage of short-term opportunities, such as sudden dips in the stock market or positive news about a particular company’s performance. Unlike SIP investments, it allows you to time your entry into the fund when you think it is most appropriate.
SIP investments in ELSS help spread out the investment risks while still taking advantage of market movements that may be favourable over time. Additionally, SIPs allow you to benefit from rupee cost averaging, meaning that when markets fall, you can purchase more units at a lower cost and fewer units when markets rise. This gives you more control over your investments and you are able to strategically manage your investments and maximise returns.
While both methods have their advantages, you, as an investor, should choose to invest in ELSS tax saving mutual funds via an SIP or as a lump sum after carefully considering your risk appetite, in-hand cash, expertise, expected tenure and return.
Also Read: 5 Income Tax Saving Tips for Small Businesses in India
