ELSS, or Equity Linked Savings Scheme, is one of the most sought-after Mutual Fund schemes in the Indian financial market. It can act as an excellent capital boosting investment other than being eligible for substantial tax benefits as per Section 80C of the Income Tax Act of India. Moreover, one can easily invest in ELSS; the entire process is streamlined and easily approachable by anyone.
Investment in ELSS can be made in 2 different ways; one can invest a lump sum amount all at once or follow a systematic investment plan (SIP) to grow their investment portfolio. Both these methods have their unique advantages and disadvantages.
In this article
- Investment Avenues – Lumpsum vs SIPs
- Benefits Of SIP Over Lumpsum Investment
- Benefits Of Lumpsum Investment over SIP
- How To choose between SIP And Lumpsum Investment?
- Factors to Consider
Investment Avenues – Lumpsum vs SIPs
Both one-time investment and SIPs for Mutual Fund schemes are beneficial for an individual. For example, an investor can make a lumpsum investment to capitalize on returns accumulated throughout the entire tenor and generate a substantial RoI. SIPs offer slightly lower returns while allowing the investor to make regular nominal investments. The first installment is invested for 10 years, second for nine years, and so on. The growth is lower than on one-time investments.
On the other hand, SIPs allow individuals to invest by gradually transferring a fixed amount to the fund of one’s choice. One does not have to pay a significant amount towards their investment in ELSS, ensuring minimal financial strain. The money also gets a fixed return in the debt funds.
Benefits Of SIP Over Lumpsum Investment
1.Simplified Investment Policy
SIPs offer a simplified way to make investments in ELSS, as the investments are spread over time. It lowers the risk of market fluctuations as only a small part of one’s investment faces market volatility.
It can prove especially helpful for new investors, as they might not be able to deduce what will be the best time to invest into the market. By investing in smaller amount, one gets to benefit by a substantial margin when the market improves.
2. Rupee Cost Averaging
SIP also allows an individual to benefit from rupee cost averaging. It is a process where fund managers purchase more units when the market is low to reduce per-unit cost of investment. These units are later sold when the market reaches its peak, ensuring higher returns.
3. Ideal For New Investors
Investing in ELSS is ideal for new investors as they build a habit of investing while being exposed to significantly less risk. As they invest a smaller but fixed sum over a longer time frame, they gain exposure to the stock market and equity linked schemes.
Investing in such tax saving schemes also allows them to save a considerable amount of money, which they can reinvest to earn better results.
Moreover, SIPs have consistently outperformed other form of investment policies, which makes them preferable amongst a number of investors.
Benefits Of Lumpsum Investment over SIP
1. Ideal For Self-Employed Individuals
Self-employed individuals, as well as investors who do not have a steady source of revenue, should consider investing in lumpsum amounts. SIPs require depositing a fixed amount on a periodic basis; investors who rely on seasonal revenues may find it difficult to keep up with the payments of a systematic investment plan.
2. Greater Tax Benefits
Making a lumpsum investment at the start of a financial year can help an investor earn substantial tax benefits under Section 80C of the Income Tax Act, up to Rs. 1.5 Lakh from the total taxable income, which can be filed with Income Tax return. It allows greater returns as well for long-term investments in ELSS.
How To choose between SIP And Lumpsum Investment?
You should carefully consider a few factors like your financial goal before you choose to make a one-time investment or go for systematic investment plans. These factors include –
The primary difference between lumpsum investment and SIPs are their varying degree of risks. SIPs come with better capital protection because you divest only a portion of your total corpus into the plan. For example, if you invest Rs. 1,20,000 in a financial year, you only have to pay Rs. 10,000 every month in SIP. It spreads the entire investment and reduces the risk involved.
Borrowers with a higher risk appetite can opt for one-time investment, as it divests the total amount into market all in one go. It also promises considerably better returns than other policies.
In both cases the returns from these funds depends on the present market conditions. SIPs usually perform better in unfavourable markets, whereas lumpsum investments in ELSS draw higher returns when the market is in a steady condition.
3. Lock-In Period
SIP and lumpsum investments come with different lock-in periods; SIPs usually offer a minimum 3 year lock-in that matures sequentially, whereas lumpsum investments are unlocked after 3 years at one go. For example, your investment in ELSS using lumpsum deposit will mature as a whole after 3 years, whereas SIP bonds will start maturing one by one (depending on the months of investment) after the 3 year threshold is complete.
For example, if an investor deposits their entire capital in an investment plan of 3 years on 1st September 2017, all the units will mature on 1st September 2020 and will be available for withdrawal any time after that.
If invested via SIP, the scenario will be different. Here, an investor deposits funds every month, starting from 1st September 2017, 1st October 2017, 1st November 2017, and so on. After 3 years, the units bought on 1st September 2017 will mature on 1st September 2020, 1st October 2017 units will mature on 1st October 2020, 1st November 2017 units will mature on 1st November 2020, and so on.
Factors to Consider
- You will be better suited to opt for a SIP if you require a steady source of income to make investments in ELSS. Whereas if you have a large corpus of funds available, you can invest in Mutual Funds via Lumpsum payments. It will also help you save taxes for a financial year if you make the investment before the month of May.
- SIPs are usually more suited for investment in volatile markets. Lumpsum investments carry more risk, which is why you should prefer a steady market for one time investments.
Mentioned above are the guidelines to invest in Mutual Fund schemes via Systematic Investment Plan or lumpsum payment. As an investor, you should carefully scrutinize your return expectations and invest in either of the options based on the factors mentioned above.
Choosing ELSS will help you maximize tax benefits under Section 80C. Lumpsum investments will be better suited if you are investing at the end of a financial year, or if you have a higher risk appetite. On the other hand, SIPs will be better suited if you want to avert risks and have a steady source of income.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.