SIP VS Lump Sum in ELSS Investments

ELSS (Equity linked Savings scheme) investments is a tax-saving investment option under Section 80C of the Income Tax Act, 1961. ELSS mutual funds invest their scheme corpus in in equity or equity-related instruments.

 

ELSS investment option can take place in the following ways; invest a lump sum amount all at once or follow a systematic investment plan (SIP) which can help to grow one’s portfolio.

 

Do remember that the ELSS investment limit in terms of tax benefit stands at Rs. 1.5 lakhs a year. You can however exceed the ELSS investment limit and there is no cap on the investible amount.

 

An investor should consider the pros and cons of SIP and Lump sum investment before preparing an ELSS investment plan.

 

Advantages of SIP

1. Simple Investment Policy

You invest a certain amount at regular intervals on a weekly, monthly, quarterly basis. This helps to reduce the risk of market fluctuations as only a small portion of one’s ELSS investment is subject to market volatility.

 

2. Rupee Cost Averaging

One invests a fixed amount of money at regular intervals irrespective of market behaviour. Thus, you buy more units when the markets are low and lesser units when they are high. This reduces your average cost per unit over the long-term.

 

3. Ideal for New Investors

New investors inculcate the habit of investing while less amount is being exposed to the risk initially. As they invest a smaller but fixed sum over a longer time frame, they gain exposure to the stock market and ELSS investments.

They also invest a considerable amount of money for long term with consistent SIP.

 

Advantages of Lump sum Investment

1. Ideal for Self-Employed Individuals

Self-employed individuals, and investors without a steady source of income, can consider investing in lump sum amounts.

 

2. Tax Benefits

Making a lump sum investment up to Rs. 1,50,000 at the start of a financial year can help an investor earn tax benefits under Section 80C of the Income Tax Act.

 

Choosing between SIP and Lump sum Investment

1. Lower investment requirement

Investor can begin investing in SIPs with as little as Rs. 500 per month, On the other hand, lump-sum investments generally need at least Rs. 5,000 depending on Scheme Information Document.

 

2. Rupee cost averaging

 An SIP allows investors to average their cost of investments. It allows them to buy more units when markets are falling and less when markets are rising. Lumpsum is suitable for investors who are well versed with the market movements, allowing them to buy low and sell high.

 

3. Lock-In Period 

Each SIP instalment have a 3-year lock-in period that matures in stages, but lump sum investments are unlocked at once after 3 years.

 

With the help of an ELSS calculator one can calculate the returns from a potential ELSS investment option. By using the ELSS calculator, one can align one’s ELSS investment and requirements together and decide the best ELSS investment option.

As an investor, you should carefully scrutinize your financial goals and prepare an ELSS investment plan.

 

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.