Is it more suitable to invest in ELSS via SIP or lumpsum?

When it comes to investing and saving taxes, a popular choice for investors is the Equity Linked Savings Scheme (ELSS). This mutual fund scheme not only helps you save taxes under Section 80C of the Old Regime of Income Tax Act, 1961, but also allows you to potentially grow your money over time. However, when deciding how to invest in ELSS, a key question arises: should you choose SIP or lumpsum?

This article will explain what an ELSS investment is, the differences between lumpsum investment and Systematic Investment Plans (SIP), and help you figure out which one might work for you.

Table of contents

• What is an equity-linked savings scheme (ELSS)?
• SIP vs lumpsum for ELSS
• Key differences between SIP and lumpsum plans for ELSS fund
• Choosing between SIP and lumpsum investment for ELSS fund
• How to work with your investment objective

What is an equity-linked savings scheme (ELSS)?

An Equity Linked Savings Scheme (ELSS) is a popular mutual fund option designed to help investors save taxes while potentially building wealth over time. It primarily invests in equities, which are shares of companies, allowing you to benefit from the potential growth of businesses over the long term. ELSS offers two significant advantages:

1. Tax-saving: You can claim tax deductions of up to Rs. 1.5 lakh annually under Section 80C of the Income Tax Act, 1961, reducing your taxable income and saving money.
However, this section is only applicable to those who have opted for the old tax regime.

2. Potential for high returns over time: Because ELSS invests in the stock market, it has the potential to deliver better returns in the long term compared to traditional tax-saving options like fixed deposits or public provident funds, which typically offer fixed but lower returns. However, mutual fund investments are subject to market risks, while FDs and PPFs offer fixed and guaranteed returns.

Another key feature of ELSS is its mandatory lock-in period of three years, during which you cannot withdraw your investment. This is the shortest lock-in period among all tax-saving options under Section 80C of the Income Tax Act, 1961. Additionally, this lock-in period encourages a long-term view towards investing.

SIP vs lumpsum for ELSS

When deciding whether to invest in ELSS via SIP or lumpsum, it’s important to understand how each method works and aligns with your financial situation. Both approaches cater to different types of investors and have their own set of pros and cons.

1. Systematic Investment Plan (SIP): SIP involves investing a fixed amount at regular intervals, typically monthly. This method is suitable for individuals with a steady income, such as salaried professionals, who want to build their investments gradually. SIPs help instil financial discipline and can be an affordable way to start investing without needing a large upfront amount. They also eliminate the need to time the market, as you invest consistently, benefiting from rupee cost averaging. When you invest in SIP, you automatically purchase more units when markets are down and fewer when they are up. This not only reduces your per-unit investment cost but also helps you capitalise on lower prices and avoid buying too much at market peaks.

2. Lumpsum investment: This method requires you to invest a large amount at once. This is suitable for investors who have surplus funds, such as from a bonus or inheritance. Lumpsum investments can yield higher returns if invested during a market dip, but they carry the risk of being exposed to market fluctuations all at once. This approach demands a good understanding of market conditions and the ability to tolerate short-term volatility.

The primary advantage of ELSS funds is their tax-saving benefit. To optimise this, investors would need to reach the Rs. 1.5 lakh investment limit each financial year.

One way to do so is through a lumpsum payment. However, that requires you to ensure you have a significant amount handy each year. Plus, you need to remember to make the payment before the financial year ends.

SIPs may thus be a more convenient way to invest in ELSS. This mode can help you reach the Rs. 1.5 lakh limit through affordable and consistent investments. Plus, SIP payments can be automated, so the money will be deducted from your bank account on the due date, helping you reach your investment target without needing to set reminders or make a fresh application each time.

Therefore, choosing between SIP or lumpsum depends on your financial goals, income stability, and risk tolerance.

Key differences between SIP and lumpsum plans for ELSS fund

	SIP	Lumpsum
Investment amount	Smaller amounts invested periodically.	A large amount invested at once.
Market risk	Spreads risk over time due to staggered investment.	Higher risk as the entire amount is exposed to the market at once.
Discipline	Encourages regular investing habits.	Requires upfront funds and discipline to stay invested.
Suitability	Suitable for salaried individuals with steady income.	Suitable for investors with surplus funds.
Market timing	No need to worry about timing the market.	Requires proper timing for optimal return potential.
Return potential	Averages out market highs and lows (rupee cost averaging).	Can provide higher returns if invested during market lows.

Choosing between SIP and lumpsum investment for ELSS fund

1. Tax planning approach

• SIPs are suitable if you have a clear idea of how much you want to invest under Section 80C and prefer spreading out your contributions.
• Lumpsum investments are suited for those who prefer to review their overall tax-saving needs closer to the financial year-end and make a single payment to bridge any gap.

2. Regular income vs. surplus funds

• If you earn a regular salary, SIP is a practical choice as it lets you invest smaller amounts monthly.
• If you’ve received a bonus or inheritance, a lumpsum investment in favourable market conditions can optimise return potential.

3. Risk tolerance

• SIP reduces the impact of market volatility because you invest regularly over time. This is especially suitable for investors who are new or cautious.
• Lumpsum requires a higher risk appetite, as your entire investment is exposed to market movements at once.

4. Market timing

• SIP doesn’t rely on market timing. By investing regularly, you benefit from rupee cost averaging, which lowers the average cost of your investment over time.
• Lumpsum can lead to higher returns if the investment is made during a market dip. However, this requires the ability to predict market trends, which is difficult even for experts.

5. Financial discipline

• SIP instils a habit of regular investing, making it easier to stay committed to your financial goals.
• Lumpsum, on the other hand, requires discipline to avoid withdrawing the funds prematurely or using them for non-investment purposes.

How to work with your investment objective

Your investment objective plays an important role in determining whether to choose ELSS via SIP or lumpsum. It’s essential to align your investment strategy with your financial goals, timeline, and available funds.

For long-term goals, like saving for retirement or a child’s education, SIP can be a good choice. By investing smaller amounts regularly, you can potentially build a significant corpus over time while staying consistent. SIP also makes it easier to stick to your plan, as the investments happen automatically, and the habit of saving becomes effortless.

On the other hand, if your goal is simply to meet your deduction limit for a particular financial year and you do not want to commit to steady investments in ELSS, a lumpsum may be more suitable.

Conclusion

The choice between investing in ELSS via SIP or lumpsum depends on your investing preferences, finances, risk appetite, and investment goals. If you’re a beginner or have a regular income, SIP in ELSS can be a beneficial way to start investing without worrying about market timing. It helps you develop a disciplined habit and reduces the impact of market volatility. If you have surplus funds or don’t want a fixed investing schedule, a lumpsum investment may be preferrable.

Both options have their own benefits, and there’s no one-size-fits-all answer. The key is to align your investment method with your goals and stick to your plan. Keep in mind that ELSS is not just about saving taxes, it can also help you grow your wealth over the long term.

FAQs

What is the difference between SIP and lumpsum investment in ELSS?

SIP involves investing small amounts regularly, while lumpsum requires a one-time large investment. SIP spreads risk over time, whereas lumpsum exposes the entire amount at once.

Which is more suitable for long-term ELSS investments: SIP or lumpsum?

SIP is more suitable for long-term investing as it reduces the impact of market volatility and promotes regular investment. However, lumpsum can be effective if invested during a market dip.

Can I switch from lumpsum to SIP investment in ELSS?

You may not be able to switch directly from lumpsum to SIP and may need to start an SIP through an application process.

Is SIP in ELSS less risky than investing in a lumpsum?

Yes, SIP can be generally less risky because it averages out the cost of investment over time, reducing the impact of market fluctuations.

How does market timing affect SIP and lumpsum investments in ELSS?

SIP removes the need for market timing as investments are spread out over time. Lumpsum is more sensitive to timing since the entire amount is invested at once, making market conditions crucial.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.