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Introduction
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.
ELSS Vs SIP - Parameters You Must Know
The following points will take you one step ahead in your journey to finding the best investment methodology:
Investment Vehicle
ELSS is an investment instrument in itself, while SIP is not. Investors may either take the SIP route to invest in any ELSS fund or equity, hybrid, debt, liquid, capital protection mutual fund, or even fund of funds. However, ELSS investors can only invest in equity stocks through the mutual fund scheme.
The composition of the ELSS scheme is universally applicable for all investors, and you cannot change or influence the scheme in any way. Conversely, the SIP route enables you to diversify your investment. So, you may conveniently invest a part of your capital in equity for high capital growth and the other part in debt for capital protection and steady growth.
Tax Deductions
ELSS funds provide tax savings of up to INR 46,800 by investing INR 1,50,000 every year. In contrast, you can only save taxes through SIP on investing in an ELSS fund.
Many informed investors take the SIP route to invest in ELSS. There are many advantages of doing so. First, it helps you spread out your investment over twelve (12) months. Second, you do not need to pay a lump sum for saving taxes. Third, SIP investments are easier to track than ELSS investments since you will have to create new ELSS accounts every year (for saving taxes).
Lock-in
ELSS mutual funds come with a lock-in period of three years. In contrast, SIP investments (other than in ELSS) do not usually come with a lock-in period. However, mutual fund houses often charge an exit load for withdrawals before one year, two years, or three years from the date of investment for some specific schemes. In contrast, you cannot withdraw ELSS investment under any circumstances before three years.
In terms of the lock-in period, SIP offers higher flexibility than ELSS. But, the flexibility might come at the cost of tax deductions, as you have to forego the tax benefits for reducing the lock-in period.
Switch
As an investor, you would prefer to switch your investment to greener pastures if you feel the market is going to behave differently. ELSS funds score negative marks in this category since you cannot do anything with your investment before the three-year period.
On the other hand, SIP investment can be easily switched, provided you haven’t invested in an ELSS fund. Mutual fund houses generally allow up to two free switches a year. Investors mostly switch from equity to debt when the capital market behaves erratically and vice versa.
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.
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