King November 8, 2019

SIP vs lump sum: Which is the better route for ELSS investment?

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 two different ways; you can invest a lump sum amount all at once or follow a systematic investment plan (SIP) to grow your investment portfolio. Both these methods have their unique advantages and disadvantages. Let’s see what they are:

Investment avenues – Lump sum vs SIPs

Both one-time investment and SIPs for mutual fund schemes are beneficial for an individual. For example, an investor can make a lump sum investment to capitalise on returns accumulated throughout the entire tenor and generate a substantial RoI. On the other hand, SIPs allow investors to invest steadily with a small sum, ergo, spreads out the financial strain throughout the year. Both score over each other in certain cases; let’s see where both routes stand, when compared.

Benefits of SIP over lump sum investment

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 the best time to invest in the market. By investing in smaller amounts, one gets to benefit by a substantial margin when the market improves.

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.

Ideal for new investors

Owing to its simplicity as a product, ELSS becomes a perfect entry product for investors, giving them the first taste of equity markets; the added tax advantage is the cherry on top. Choosing to invest in ELSS funds via SIP route further simplifies the process for novice investors, who can start with a small sum and spread their risks over the tenor.

SIP route also inculcates a habit of planned investing and discipline; essential ingredients for the investing success recipe. An investor going the SIP route, will have to plan his investment strategy in advance and consciously assimilate proper tax planning in their investment plan.

Starting an SIP early in ELSS funds also gives the much-needed peace of mind; you no longer have to indulge in last-minute tax-saving practices which may result in underutilisation of the tax exemption limit, putting money in assets that don’t appreciate your wealth, or worse still, foregoing tax-saving completely due to last-minute glitches.

Benefits of lump sum investment over SIP

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 lump sum 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.

Best option for year-end tax planning 

If for any reason you haven’t been able to plan your taxes, you can invest a lump sum amount of Rs 1.5 lakh in ELSS funds. The process is simple and many investment platforms allow fast onboarding and paperless KYC to make the process hassle free. However, putting off tax saving for the last moment, is something that should be avoided ideally.

How to choose between SIP and lumpsum investment?

You should carefully consider a few factors before you choose to make a one-time investment or go for systematic investment plans. These factors include:

Risk appetite

The primary difference between lump sum investment and SIPs are their varying degree of risks. SIPs come with better capital protection, because you invest only a portion of your total corpus into the plan. For example, if you invest Rs 120,000 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 invest the total amount into market, all in one go.

Returns

In both cases the returns from these funds depend 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.

Lock-in period

SIP and lump sum investments come with different lock-in periods; SIPs usually offer a minimum 3-year lock-in that matures sequentially, whereas lump sum investments are unlocked after three years at one go. For example, your investment in ELSS using lump sum deposit will mature as a whole after three years, whereas SIP bonds will start maturing one by one (depending on the months of investment) after the three-year threshold is complete.

For example, if an investor deposits their entire capital in an investment plan of 3 years on t September 1, 2017, all the units will mature on September 1, 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 September 1, 2017, October 1, 2017, November 1, 2017, and so on. After 3 years, the units bought on September 1, 2017 will mature on September 1, 2020, October 1, 2017 units will mature on October 1, 2020, November 1, 2017 units will mature on November 1, 2020, and so on.

Better appreciation

Whether you choose the SIP route or the lump sum route, ELSS will give your capital a better chance at appreciating, compared with other avenues. Judiciously weigh the pros and cons of each route and then take a call. Always include tax planning consciously in your financial plan and don’t resort to last minute tax saving. The considerable amount of money, good tax planning saves, can be further reinvested for a better utilisation.

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