ELSS (Equity Linked Savings Scheme) mutual funds provide an ideal opportunity to get the best of both worlds – capital appreciation and tax savings simultaneously. Also known as tax saving mutual funds, ELSS investments can reduce your taxable liability under Section 80C of Income Tax Act. Plus, you can maximise the value of your investment with the growth potential of equities.
When deciding how to invest in ELSS funds, one important decision is whether a lump sum investment is better or a systematic investment plan (SIP). Both approaches have their pros and cons and can be suitable for different investors depending on their financial situation, risk appetite, age, and goals.
A thorough assessment of both methods may help you develop a more sophisticated investment strategy that could lead to greater profitability in the long run. On that note, take an in-depth look at both lump sum and SIP investments in ELSS, what makes up each strategy and their respective pros and cons.
Pros and cons of investing in ELSS through an SIP
- You can invest in ELSS online via an SIP with just 500 rupees per month.
- With the rupee cost averaging approach in SIPs, your average purchase price per unit decreases over time since you buy more units when the prices are low and fewer units when the prices are high. This helps reduce your overall risk and can maximise your investment returns over time.
- Investing through SIPs also allows you to stay disciplined and consistent with your investments, which is an important part of any successful long-term investment strategy. By setting up auto payments into your account, you can stay on track with your investments, even if you get busy at times.
- Through an SIP, ELSS mutual funds automatically rebalance based on changes in the market conditions so that you don’t have to keep adjusting them yourself every few months or years. This ensures that you have a diversified portfolio without having to worry about constantly monitoring it yourself.
Cons – Once investors make a lump sum deposit into ELSS, all returns mature as a whole at the end of 3 years. Conversely, when investments are made via SIPs, each bond will mature individually following the three-year lock-in period.
Pros and cons of investing in ELSS via lump sum
- Lumpsum in ELSS funds allows you to time the market. By timing the market, you can ensure that you are investing when prices are low and expected to rise.
- You have more flexibility to find the investment that suits your risk profile, timeline and objectives best. You can individually select from various funds depending on your needs, such as large-cap, mid-cap, and sectoral funds.
- It allows you to get the most out of compounding compared to SIP This is because, with lump sum investments, your principal amount is greater from the beginning, which can leverage higher returns as compared to SIPs.
Cons- Lump sum investments require excellent knowledge and expertise about the markets to succeed. Also, it is important to understand that investing all your money in ELSS funds at once exposes your entire investment to risk. So, if there is an unexpected downturn in the market or a particular asset underperforms, you could incur major losses.
Closing thoughts
Both lump sum and SIP investing have their own specific advantages that can help you achieve your investment objectives, whether it be long-term capital appreciation or compounding wealth. However, all the investments you make should align with your personal financial goals, risk profile, expenditures, affordability, and expected return.