Equity Linked Savings Scheme (ELSS) features amongst the top mutual fund schemes for investors, beginners and experts alike. It offers tax benefits up to Rs.1.5 lakh under Section 80C of the Income Tax Act. Besides, it has the shortest lock-in period of three years compared to its other 80C counterparts, making it a highly attractive investment option. There are two ways to invest in an ELSS fund – SIPs or lump sum.
The article compares in mutual funds SIPs v/s lump sum to decide the better way to invest.
Merits of SIPs in mutual funds over a lump sum mutual fund investment
- Rupee cost averaging
SIPs allow you to enter the market at different points in time that can average your purchase cost over the investment period. This is because you buy lesser units when the demand is high and vice versa.
- Convenient investment policy
SIPs let you invest from as low as Rs.500. Plus, there could be a lower risk of market fluctuations as only a portion of your total investment is exposed to market volatility.
- Ideal for novice investors
ELSS can be ideal for new investors looking for an entry into equities. SIPs further simplify the process by allowing them to start small and spread their risks over the investment period.
Merits of lumpsum investment over SIP
- An excellent option for year-end tax planning
If you are unable to invest during the financial year, making a lump sum investment up to Rs.1.5 lakh in ELSS funds can help you save tax. However, it is recommended to plan your taxes well in advance.
- Perfect for self-employed individuals
Many self-employed individuals have seasonal revenues and not a steady source of income. For such individuals, it could be a good idea to invest a lump sum amount instead of trying to keep up with monthly SIP payments.
Deciding the right option
Here are some factors to consider an investment mode in ELSS:
- Risk appetite
Investors with a high-risk tolerance can afford to invest via lump-sum payments. SIPs are a better option for conservative investors with low to moderate risk appetite.
- Returns
SIPs tend to perform well in unfavourable markets, whereas lump sum investments in ELSS perform well when markets are stable. The returns could vary depending upon the market conditions.
- Lock-in period
As noted earlier, ELSS has a lock-in period of three years. SIPs mature sequentially based on the months of investment, whereas lump sums mature at one go.
Conclusion
Before you invest in mutual funds, know the features of SIPs and lump sums to identify the option that suits your investment style.
For self-employed individuals, a lump sum can be a good way to invest if the revenues are seasonal. For salaried individuals with a regular monthly income, SIP investments make more sense as they can invest fixed amounts every month. You can read more about how to invest in SIP and consider taking professional help for better clarity.
