Mutual Funds
by 5paisa Research Team Last Updated: 2023-07-04T11:42:57+05:30


ELSS and SIP are the two most popular investment methodologies, followed by capital and secondary market investors. However, a quick scan of the definition would prove that the ELSS and SIP are fundamentally different. The following sections debunk all myths surrounding the ELSS vs SIP debate so that you can choose the best investment methodology for fulfilling your financial goals.


What is ELSS?

ELSS, the abbreviated form of Equity-Linked Savings Scheme, allows you to save taxes while getting the opportunity to earn higher-than-FD profits. ELSS investors can save taxes of up to INR 46,800 on an investment of INR 1,50,000 under Section 80C of the Income Tax Act, 1961. Incidentally, ELSS is the one and only mutual fund type that facilitates tax saving. 

ELSS mutual funds typically come with a lock-in of three (3) years. No other tax-saving cum investment instrument in India offers such low lock-in period. Tax saving and the possibility of higher returns than conventional investment instruments drive the popularity of ELSS mutual funds. 

ELSS mutual funds provide the right mix of inflation-beating returns and stability. You may scan websites like 5paisa to find the best-performing ELSS schemes and invest within minutes. 


What is SIP?

SIP, the abbreviated form of Systematic Investment Plan, is one of the two (the other being lump sum) prevailing systems of investment in mutual funds. People taking the SIP route of investment contribute a fixed amount every month to any fund they want to. The mutual fund house deducts the prefixed amount on the same date of every month. You may also opt for the quarterly or half-yearly mode by selecting the correct option at the time of investing. 

The amount of SIP investment depends on the investor, and there is no maximum limit to how much you can invest every month. However, the SIP amount must be higher than the minimum investible amount. The minimum investible amount usually ranges between INR 500 to INR 1,000 per month.


5 major differences between ELSS and SIP

Following are the top 5 differences between investing in ELSS Vs SIP:

1. Modification of Investments

If you think the market will perform differently, you would like to move your investment to better grounds. ELSS funds receive low grades in this area since you are unable to use your investment prior to the three-year window.However, if you haven't invested in an ELSS fund, switching your SIP investment is simple. Mutual fund companies typically permit two free transfers every year. When the capital market swings irregularly, investors typically convert from equities to debt, and vice versa.
2. Finance Vehicle

While SIP is not an investing vehicle in and of itself, ELSS is. Any ELSS fund, as well as equity, hybrid, debt, liquid, capital protection mutual funds and even fund of funds, are all available for investment using the SIP method. However, ELSS investors are limited to using the mutual fund plan to purchase equities securities.

All investors must adhere to the ELSS scheme's composition, which you cannot alter or have any sort of influence over. On the other hand, you may diversify your investments by using the SIP approach. Because of this, it is practical to invest some of your money in equities for strong capital growth and some in debt for capital protection and consistent growth.

3. Lock-in Period

ELSS mutual funds have a three-year lock-in term. SIP investments (other than in ELSS) typically do not have a lock-in period. However, for some specific schemes, mutual fund institutions sometimes levy an exit load for withdrawals made before one year, two years, or three years from the date of investment. In contrast, you cannot remove an ELSS investment before three years under any circumstances.

In terms of lock-in duration, SIP is more flexible than ELSS. However, the flexibility may come at the expense of tax deductions, since you must renounce tax benefits in order to shorten the lock-in period.

4. Deductions for Taxes

By investing INR 1,50,000 each year, ELSS funds can save you up to INR 46,800 in taxes. In contrast, you can only avoid taxes by investing in an ELSS fund through SIP. Many knowledgeable investors use the SIP method to invest in ELSS. There are several advantages to doing so. For starters, it allows you to stretch out your investment over a period of twelve (12) months. Second, there is no need to pay a flat sum to save taxes. Third, SIP investments are easier to manage than ELSS investments since you must open fresh ELSS accounts each year

5. The Advantage of  Rupee Costs Averaging

The primary advantage of investing through SIPs is the benefit of rupee cost averaging. SIPs have a lower average cost over time than lump sum investments in mutual funds. Furthermore, because SIPs are continuous, investors can obtain additional units of the fund if the NAV falls, and if the NAV rises, the value of their investment rises.This SIP advantage is also available in ELSS funds if invested in them through SIPs.


ELSS or SIP- which is better?

The following information will help you advance in your search for the finest investing methodology and understanding which is better: ELSS or SIP

Investors may benefit from systematic tax savings choices and avoid having to rush at the last minute to lower their tax incidence by making ELSS fund investments through SIPs.
SIP investments will help investors develop a disciplined approach to saving money while also allowing them to take advantage of rupee cost averaging, which will ultimately increase their returns on ELSS funds.
As was already noted, ELSS and SIPs are two distinct ideas that fall under the umbrella of mutual funds. It would be like attempting to compare apples with oranges. Therefore, it is obvious which is superior. Investors may maximize their advantage by combining the advantages of these two ideas.

Make The Right Selection and Reap Rich Dividends

Now that you know the top differences between ELSS and SIP, you can select the best option for your needs. SIP is more flexible than ELSS. But ELSS is a preferred option for the tax benefits associated with it. Intelligent investors often take the SIP route to invest in ELSS funds. 

Visit 5paisa to read more such exciting and informative articles and take your online trading account to new heights. 

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More About Mutual Funds

Frequently Asked Questions

For first-time investors, ELSS funds are a good choice. Aside from tax advantages, these funds have the potential to provide better rates of return than other tax-saving choices under 80C.

ELSS mutual funds are the only type of mutual fund that is exempt from taxation under Section 80C of the Income Tax Act of 1961. You can receive a tax credit of up to Rs 1,50,000 per year if you invest in an ELSS. This allows you to save up to Rs 46,800 in taxes every year.

Tax deductions for ELSS funds are available up to Rs. 1,50,000, however they are not tax-free investments until they are redeemed. When ELSS funds are redeemed, long-term capital gains are incurred. However, there is an exemption for taxpayers up to Rs. 1,000,000 every fiscal year; beyond that, they are subject to a 10% tax rate (excluding cess and surcharge)

After ELSS fund investments are made through SIPs, the units purchased first will be redeemed first when the 3-year lock-in period is up. In other words, when the investor has held the units for at least three years, they may be redeemed on a first-in, first-out basis.