As the financial year, 2017-18 is inching towards the end, it is that time of the year again when the taxpayers are busy finalizing their tax-saving investments. As usual, Equity Linked Savings Schemes ( ELSS ) are on the shopping list of many discerning investors looking to save taxes.

Question that an investor often have about ELSS investments, is whether Systematic Investment Plan (SIP) a better investment mode than lump sum amount.

While this question applies to all mutual fund investments, for many investors the question is more relevant for ELSS investments, because they are committed to making ELSS investments every year to get tax deduction of up to ₹1.5 lacs under section 80C.

Ways to Invest in ELSS?

ELSS gives 2 options for investments. First through a lump sum or second through Systematic Investing Plan (SIP).

But the question in most of the ELSS investor sort is whether to go for Systematic Investment Plan (SIP) investment mode or invest in one go i.e, via Lumpsum mode. Lets gauge both scenarios :

Lump Sum Investment in ELSS?

A lump sum is a single large investment done by an investor in one go.

As this financial is ending soon, many new mutual fund investors are hellbent on investing a lumpsum in ELSS to save taxes this year. Though advisors say this is risky as the market is currently hovering around its all time high and fluctuating every day/week, but the new investors are not in a mood to listen.
ELSS are equity schemes that invest most of their corpus in stocks. That is why investment experts ask investors to spread out their investments in ELSS and hold on to their investments for a longer period.
If you invest a large sum in one go, you could end up catching a high point of the equity markets. If the markets fall sharply thereafter, a substantial portion of the value of your money can get eroded in the short-term.
Since, ELSS is also a tax-saving investment and they come with a mandatory lock-in period of 3 years, investors have started believing that it is okay to invest a lumpsum in ELSS. It is strictly okay to invest a lumpsum in them, provided you have a long investment horizon of 7 to 10 years.
If you are not one of those investors who just wait for the lock-in to get over or who checks the returns on a daily basis, you can go for a lumpsum also. ELSS come with a mandatory lock-in period of three years, investors can anyway not take any bad decisions. But make sure you have an investment horizon of more than 5 years and a good risk-appetite.
However, the ideal method to invest in them is staggering your investments over the whole financial year. It will help you to average the cost of purchase and beat volatility. Also, it imparts financial discipline to your life.
So, to save yourself from the stress this may induce, you should always opt for SIP to invest in equity.

SIP in ELSS?

An SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular interval. It is similar to regular saving schemes like a recurring deposit.

In a SIP instead of a lump sum the investment is done regularly on specific intervals either weekly or monthly or quarterly. Though weekly investments might be troublesome and Quarterly investments will be like a lump sum way of investing only, the best mode would be going for monthly SIP. Here you will divide your planned lump sum investment into 12 equal parts, say if you plan to invest ₹1,20,000 in March as a lump sum, in a SIP you will invest ₹10,000 per month.

Read More: 13 Things to Know About SIP.

It is one of the best ways to invest and tested method of minimizing risk and yet enjoying good returns, by regular, periodic investment, over a long horizon.

Most financial advisors and a large number of investors prefer investing in ELSS through SIPs. The obvious benefit of SIP is that it helps investors to average the rupee cost of a unit and thereby helps the investor to earn higher returns in the long term.

ELSS is a equity oriented scheme that invest most of their corpus in stocks. So financial experts ask investors to spread out their investments in these schemes and hold on to their investments for a longer period to getaway from the risk and volatility in the stock market.

It is recommend to staggering the investments over the whole financial year as it will help investors to average their purchase cost. It also helps them to invest in a disciplined manner no matters what is the current market conditions.

SIPs enforce financial discipline without any effort. Here are examples of problems faced by investors due to the lack of financial discipline :

  1. Many investors scrambling at the last minute to make their 80C investment. Apart from the stress related to the last minute tension involved in the last minute scrambling, investors lose out returns they would have earned if they were investing through monthly SIPs throughout the year.
  2. Missing their 80C investment deadline of March 31, by few investors. As a result, they have to pay higher taxes which otherwise is completely avoidable, not to mention the loss of returns.
  3. Many companies have an internal deadline of late January, mid February or late February for their employees to submit their 80C investment proofs for TDS purposes. If the employees fail to furnish the proofs before the company deadline, higher TDS will be deducted by the company and then the employees will have to go through the inconvenience of claiming income tax refund in their income tax returns.
  4. Lack of financial discipline may also cause investors to spend the savings that they should have invested for tax planning. This results in investors paying higher taxes, not to mention the loss of future returns.

Tax planning investments are something that a taxpayer has to make every year. SIPs are advantageous in that respect. If you select a good ELSS fund and start a monthly SIP based on your tax planning requirements, you can take care of your tax planning investments, at the least the portion related to ELSS, with a small one-time effort.

Finally, if you have to make ELSS investments every year for tax saving, over a long investment horizon, the difference in returns between lump sum investment and SIPs will be, in most cases, not be very significant.

Also remember, ELSS, being a tax saver fund have 3 years of lock-in period. i.e., it will give you very low liquidity as you cannot redeem your money before 3 years. If you are investing in ELSS through SIP, each installment can be redeemed after 3 years in the similar fashion.

Investing periodically also spreads the burden and makes a good investment habit of an investor. You can invest in ELSS without any paperwork on Groww.

Best ELSS Mutual Funds to Invest

Here are the best ELSS funds you can invest in.

Aditya Birla Sun Life Tax Relief 96

This is an ELSS launched in March 06, 2008. It is a fund with moderately high risk and have given a return of 25.65 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  26.63 %
3 years  11.25 %
5 years  22.58 %

Here are the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 5-star fund by Groww.
  • AUM of close to ₹ 4759 Cr.
  • Age is nearly 10 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark S&P BSE 200 Fund since its launch.
  • The top portfolio holdings of the fund include Sundaram Clayton Ltd., Honeywell Automation India Ltd., Gillette India Ltd., Bayer CropScience Ltd., Reliance Industries Ltd., Pfizer Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Consumer Goods ( 19.1 % ) followed by Financial Services ( 17.6 % ) and Automobile ( 14.6 % ).

  • Minimum SIP = ₹ 500
  • Equity share = 98.8 % , Debt share = 0 % and Cash = 1.2 %

  • Large Cap share= 40.5 % , Mid Cap share = 59.4 % and Small Cap share = 0.1 %

This fund is one of the best ELSS fund available in market which you can invest in with minimum SIP of ₹ 500. This also provided best returns over the years as compared to other ELSS. Associate with this fund, if you are thinking of investing in ELSS for a longer duration.

Reliance Tax Saver Fund

This is an ELSS launched in September 21, 2005. It is a fund with moderately high risk and have given a return of 15.77 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  17.48 %
3 years  6.91 %
5 years  22.56 %

Here are the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 5 star fund by Groww.
  • AUM of close to ₹ 10758 Cr. Returns tend to go low once AUM exceeds a certain amount
  • Age is nearly 12 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark S&P BSE 100 Fund since its launch.
  • The top portfolio holdings of the fund include ICICI Bank Ltd., HDFC Bank Ltd., Larsen & Toubro Ltd., Reliance Industries Ltd., SBI, Infosys Ltd., Maruti Suzuki India Ltd., Kotak Mahindra Bank Ltd., Grasim Industries Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Industrial Manufacturing ( 10.3 % ) followed by Financial Services ( 23.9 % ) and Automobile ( 10.3 % )

  • Minimum SIP = ₹ 500
  • Equity share = 97 % , Debt share = 0.2 % and Cash = 2.8 %

  • Large Cap share= 84.9 % , Mid Cap share = 15.1 % and Small Cap share = 0 %

This fund is one of the best ELSS fund available in market which you can invest in with minimum SIP of ₹ 500 Associate with this fund, if you are thinking of investing in ELSS for a longer duration.

DSP BlackRock Tax Saver Fund

This is an ELSS launched in January 18, 2007. It is a fund with moderately high risk and have given a return of 14.58 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  15.41 %
3 years  10.99 %
5 years  20.44 %

Here’s the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 4 star fund by Groww.
  • AUM of close to ₹ 3834 Cr.
  • Age is nearly 10 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark Nifty 500 since its launch.
  • The top portfolio holdings of the fund include ICICI Bank Ltd., HDFC Bank Ltd., Larsen & Toubro Ltd., Reliance Industries Ltd., SBI, Gail (India) Ltd., Maruti Suzuki India Ltd., HPCL, Grasim Industries Ltd., ITC Ltd. etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Financial Services (37%) followed by Energy (12%) and Automobile (9.4%).

  • Minimum SIP = ₹ 500
  • Equity share = 99 % , Debt share = 0 % and Cash = 1 %

  • Large Cap share= 60.1 % , Mid Cap share = 27.9 % and Small Cap share = 12 %

This fund is one of the well-performing ELSS fund available in market. Associate with this fund, if you are thinking of investing for longer duration.

IDFC Tax Advantage (ELSS) Fund

This is an ELSS launched in December 28, 2008. It is a fund with moderately high risk and have given a return of 20.95 % since its launch.

Returns per annum over the years from this fund are :

Duration Returns
1 year  30.97 %
3 years  11.89 %
5 years  21.80 %

Here’s the key features of Reliance Tax Saver Fund :

  • This fund has been rated as a 4 star fund by Groww.
  • AUM of close to ₹ 897 Cr.
  • Age is nearly 10 years. So its performance can be easily judged.
  • Has consistently outperformed its benchmark S&P BSE 100 since its launch.
  • The top portfolio holdings of the fund include KEC International Ltd., HDFC Bank Ltd., Future Retail Ltd., ICICI Bank Ltd., Minda Industries Ltd., Maruti Suzuki India Ltd., VRL Logistics Ltd., CBLO (CCIL) etc.
  • The holdings are balanced across various sectors with maximum weightage given to the Financial Services ( 24.3 %) followed by Consumer Goods ( 13.7 %) and Automobile ( 11.4 % ).

  • Minimum SIP = ₹ 500
  • Equity share = 93.7 % , Debt share = 0 % and Cash = 6.3 %

  • Large Cap share= 48.4 % , Mid Cap share = 36.9 % and Small Cap share = 14.6 %

Launched in 2008, IDFC Tax Advantage Fund, is a ELSS fund which has consistently outperformed its benchmark since its inception and has provided best returns over the years among ELSS funds.

What is ELSS?

ELSS is a dedicated mutual fund scheme that allows investors to save tax. It also provides an opportunity for long-term capital appreciation.

Amongst all the tax savings schemes this is the only aon which gives the proper feel of pure equity. Even though ELSS has some risk involved, but with minimal lock-in period, it has emerged as the most attractive tax saving vehicle today.

An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high returns.

Key features of an ELSS Fund :

  • A surrogate route to direct stock markets
  • Tax saving instrument
  • Three year lock-in period
  • Can be held even after the completion of three years
  • Offers dividend as well as growth options.
  • Lower minimum investment option.
  • One can invest in small amounts through SIP
  • Potential to deliver higher returns on investment.

Read More: All You Need to Know About ELSS funds. 

ELSS is a category of mutual fund that the government created to encourage long-term investing in equity. In order to do improve equity participation the government allowed investment in equity-based mutual funds to be tax deductible through ELSS schemes.

By offering a tax deduction, the average citizen is encouraged to invest a larger part of their savings in equities. Investing in an ELSS can benefit an investor in multiple ways.

Why ELSS for Tax saving investment instrument?

These are several tax saving options available to get tax benefit under section 80c. Here is the comparison between popular tax saving instruments:

Investment

Risk Profile Interest Guaranteed Returns Lock-in Period

ELSS funds

Equity -related risk

12-15 % expected No

3 years

PPF

Risk-free

8.10 % Yes

15 years

NPS

Equity-related

8-10 % expected No

Till retirement

NSC

Risk-free

8.10 % Yes

5 years

FD

Risk-free

7-9 % expected Yes

5 years

ULIP

Equity -related risk

8-10 % expected No

5 years

Sukanya Samriddhi

Risk-free

8.60 % Yes

21 years

SCSS Risk-free 8.60 % Yes

5 years

As seen in the table above, investing in ELSS mutual funds has several advantages over investing in other investment options under section 80c in terms of return on investment and lock-in period.

Read More: 15 Things to Know About ELSS Funds.

Many new investors often get scared when they learn that ELSSs invest mostly in stocks and carry a higher risk. However, you can overcome this if you are prepared to stay invested for a long period.

Countless studies prove that one can beat volatility and make superior returns from stocks by staying invested for a long period. You should remind yourself that equity has the potential to offer superior returns than other asset classes over a long period.

ELSS fund does not offer guaranteed returns, as returns you get are market linked. Since your investment will be locked in ELSS for 3 years, you benefit by staying invested for long periods of time. Lock-in period in ELSS helps you grow your money by staying invested in the market and not selling, during sudden falls in the stock market.

However, looking at the past trends among ELSS funds, you can expect a return of between 12-15 % annum on your investment.

Conclusion

ELSS are an excellent way to grow your money and save tax at the same time. Like any other equity mutual fund, the best way to invest in ELSS is through the SIP mode. You should plan ahead and spread your investments throughout the year to reduce the risk of entering the market at a wrong time.

Though the benefits of SIP are immense, the final mode of investing depends on the amount of funds available and the risk appetite of the individual. In one has strong view of the market and can project how it may move, then choosing SIP or lumpsum is important to determine final return.

Tax saving is just one aspect of ELSS investments, wealth creation should also be an equally important objective. The key to equity investment is to remain invested for a sufficiently long time horizon of at least 5-7 years.

To look at some of the best performing funds from every category of mutual funds, check out Groww 30 best mutual funds to invest in 2018.

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.