ELSS and SIP are two critical terms when it comes to mutual fund investing. While ELSS is a type of mutual fund, SIP is a mode of investment into any type of mutual fund. Let’s understand in detail what each of them means
ELSS or Equity Linked Savings Scheme: ELSS schemes are those mutual fund schemes that invest at least 80% of their assets in equity. It is an equity mutual fund category.
SIP: SIP expands to systematic investment planning. SIP is a mode of investment for mutual funds. It allows you to invest in mutual funds in a certain regularity.
For example, monthly SIPs allow you to invest a certain fixed amount in a mutual fund scheme every month. Like that, there are weekly SIPs, half-year SIPs, yearly SIPs and more.
Almost all mutual funds allow you to invest via two routes:
You can invest as low as Rs 500 per month for various mutual fund schemes. In fact, you can invest in an ELSS using the SIP option.
Since one is a mode of investment and the other is a mutual fund scheme, they are not comparable head to head. Nevertheless, we shall use this space to lay down some of the key features of both the concepts.
Most of the times when you are first registering for SIPs, you will be asked to set a mandate for that amount. This mandate will enable automatic reduction of that amount from your bank account in the regularity you chose for your mutual fund. You will be expected to maintain that amount of balance at least around the time the mandate is set.
1) SIP Option Available Via ELSS
As discussed previously, ELSS is a category and SIP is a mode of investment. Hence establishing an ELSS vs SIP argument is not valid. This means you can invest in an ELSS fund via the SIP route. You can also use the lump sum route to invest in ELSS schemes.
2) Lock-In Period
In the case of SIPs, the lock-in principle does not apply, because it is a mode of investing. If you have chosen for monthly SIP, you have to pay the mutual fund company the fixed amount on a particular date every month. Every AMC has its rules and penalties regarding non-payment of SIPs or on failure to tender the amount on the specified date. In case you are investing in a mutual fund that has a lock-in period, via a SIP, then the lock-in will be applicable. This is explained in detail ahead. There is no difference between ELSS and SIP as such.
ELSS funds have a lock-in period of at least three years. Meaning, you cannot withdraw your money for three years.
If you invest in ELSS via SIP route, each investment will be locked in for a period of three years, from their respective investment date. Let’s understand this through an example.
Say the NAV of the fund on 1st January 2018 was 50, so the number of allotted units will be 100. This becomes eligible for redemption on 1st January 2021.
Similarly, the units bought on 1st February 2018 will be eligible for redemption on 1st February 2021, i.e. on completion of the SIP. The same process follows for each of the subsequent SIPs.
An additional benefit that comes with ELSS schemes is that of tax benefits under section 80C. Under this section, an investor is exempted from tax up to Rs. 1,50,000 and ELSS is one of the many ways you can save tax under section 80 C.
The amount that you plan to invest in ELSS can be deducted from your salary before calculating taxes. No other category of mutual fund provides tax benefits.
This is not a difference between ELSS and SIP. You can invest in an ELSS mutual fund through the SIP or lumpsum mode and you will still be able to save tax.
Makes you a disciplined investor: SIPs can help if you don’t have much knowledge about the market and you are new to the investment world. Since you can invest as low as Rs 500, it helps to bring in newer and younger investors as well who have problems with saving money.
Rupee cost averaging:
Your investment amount remains constant in SIP. If the NAV of the mutual fund falls, more units get credited to your account and if the NAV rises, the value of the investment. This way, SIP helps to average out rupee fluctuations.
Most of your confusion relating to investing through ELSS and SIPs should have been put to rest after reading this article. SIP is instrumental in roping in many investors into the mutual fund world and the ELSS scheme pulls investors with its tax-saving feature. While many do use ELSS to save taxes, do keep in mind your risk and goals as well.