Which is better for ELSS investment: SIP vs Lump sum?

ELSS investment

ELSS stands for Equity Linked Saving Scheme – an equity-oriented mutual fund that comes with a three-year lock-in period and tax benefits. Investors can claim a tax deduction on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. ELSS is popular among investors because it is among the best avenues to save tax and increase wealth at the same time.

SIP and lump sum

There are two ways you can invest your money in ELSS fund:

  1. Systematic Investment Plans (SIP)
  2. Lump sum

SIP is an investment method where you invest a fixed amount of money in a mutual fund on a monthly, quarterly or semi-annual basis. For example, investing Rs. 10,000 each month in an ELSS fund of your choice is a SIP investment.

On the other hand, under the lump sum investment strategy, you invest a large portion of money in mutual funds at once. Investing Rs. 5 lakh (or any other large amount) into an ELSS fund at one go is a lump sum investment.

SIP vs Lump sum: What option should you choose?

The first question investors invariably ask is, which is a better option? The answer depends on what you are seeking. You would need to consider a few factors before investing in either of the two options.

  1. Investment amount

If you earn a monthly salary and depend on savings to make investments, an SIP is a good strategy for you. The most significant advantage a SIP offers is you don’t need to have a large sum of money to start investing. You can begin your investment journey with as little as Rs. 500 per month. But this only works if you make regular transfers to the fund on the assigned date. However, if you have a sum of money you wish to invest, you can proceed with a lump sum investment in ELSS.

  • Experience

In a lump sum investment strategy, you can invest the entire amount in an ELSS fund at one go. However, this mode can come with a degree of risk. If you invest at the right time when markets are low, it is possible to see high returns on your investment. However, you could stand to lose a significant amount if the markets suddenly move downwards. Experienced investors who have in-depth knowledge of market movements and valuations typically implement this strategy. Therefore, if you are an experienced investor with a large sum of money, this could be a good investment option. However, if you are new to investing, it may be a better idea to go the SIP route.

This is because, in a SIP, you benefit from Rupee Cost Averaging. This is a process where you invest a specified amount of money in buying units regardless of market movement. When the Net Asset Value (NAV) of the fund is low, you would be able to buy more units. And when the NAV rises, the number of units would decrease. This helps to average out costs over the investment tenure.

  • Tax benefits

When you invest in ELSS funds either through SIP or lump sum mode, you can avail tax deduction on investments up to Rs. 1.5 lakh, each year, under Section 80C of the Income Tax Act. However, the government had changed rules for capital gains during the 2018 Union Budget. Investors now pay 10% Long Term Capital Gains (LTCG) tax on returns from shares and equity-oriented mutual funds that exceeds Rs. 1 lakh. This tax rule mainly affects lump sum investments.

Assuming you invest Rs. 8 lakh in an ELSS fund that offers a return of 15%, your fund value would grow to Rs. 9.2 lakh at the end of the year. And since your returns exceed Rs. 1 lakh, you would have to pay 10% tax on the remaining Rs. 20,000.

Conclusion

Both SIP and lump sum are excellent strategies to consider investing in ELSS funds. However, based on your situation and investment goals, you could decide the best route. If you have a corpus to invest and are knowledgeable about market movements, you can invest through a lump sum. Otherwise, it is better to invest in ELSS through SIP.

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