The Equity Linked Savings Scheme, or ELSS, is an open-ended mutual fund with a three-year obligatory lock-in period. In an ELSS, equity accounts for more than 80% of the assets. The only mutual fund plan covered by Section 80C of the Indian Income Tax Act of 1961 is the ELSS, which allows an investor to deduct up to Rs. 1.5 lakhs from taxable income by investing in an ELSS plan.
A three-year lock-in is required for ELSS or tax-saving funds. With a lump-sum payment, your investment is unlocked all at once three years after purchase. For example, if you deposit Rs. 1.5 lakh in an ELSS on March 31, 2019, your money will be invested until March 31, 2022. You can either sell all of your units or keep them. Your investments in a SIP, on the other hand, will mature one by one, every month, beginning March 31, 2022. Only by March 31, 2023, will all of your investments be unlocked.
Individuals benefit from both one-time investments and SIPs for mutual fund programs. SIPs provide lower overall returns in consideration of the investor's ability to make regular nominal investments. The rate of return is lower than it would be on a one-time investment.
Benefits of SIP
A monthly SIP in an ELSS fund ensures that you invest a portion of your earnings while avoiding paying taxes. As a result, it instills the habit of frequent investment and ensures that your money works for you.
Because ELSS is an equity investment, it is highly volatile in the near term. If you wait until the end of the year, you may wind up investing a large chunk of money at a time when the markets are at their peak. Investing in a monthly SIP ensures that you invest at regular intervals, regardless of market conditions. This aids in the cost averaging process over time.
If you wait until the end of the year to plan your taxes, you could wind up having to make a one-time investment of Rs.1,50,000. However, with a SIP, it's far easier to invest Rs.12,500 per month and earn Rs.1,50,000 over the course of the year.
As a result, SIP is an excellent tool for paid folks who are experiencing cash flow issues.
Benefits of Lumpsum Investment over SIP
Ideal For Business Persons
Individuals who are self-employed, as well as investors who do not have a consistent source of income, should consider investing in lump sum quantities. SIPs demand a predetermined amount to be deposited on a regular basis; investors who rely on seasonal revenues may struggle to keep up with the payments of a structured investment plan.
Making a lump-sum investment at the beginning of the financial year might enable an investor to receive significant tax benefits under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh from total taxable income, which can be lodged with the Income Tax return. It also provides for higher returns on long-term ELSS investments.
Lumpsum Or SIP In ELSS?
The main distinction between the two approaches is the degree of risk involved. Because you're just investing a portion of your overall investment, SIPs provide better capital protection. If you're a seasoned investor, we encourage lump-sum investing.
If you're a first-time investor, a SIP is a great way to get into the habit of investing. When you invest a huge sum of money, you must invest at the correct time. Starting SIPs does not necessitate market timing.
SIPs and lumpsum investments have differing lock-in periods; SIPs typically have a 3-year lock-in period that matures in stages, but lumpsum investments are unlocked all at once after 3 years.
For example, if you invest in an ELSS with a lumpsum deposit, your investment would mature all at once after 3 years, whereas SIP bonds will mature one by one (depending on the months of investment) once the 3-year period has passed.
For example, if an investor invests their entire cash in a three-year investment plan on September 1, 2019, all of the units would mature on September 1, 2022, and can be withdrawn at any time after that.
The situation will be different if you invest through a SIP. Every month, beginning on September 1, 2019, 1st October 2019, 1st November 2019, and so on, an investor deposits amount. The units purchased on September 1, 2019, will mature on September 1, 2022, 1st October 2019 will mature on 1st October 2022, and so on.
The situation will be different September 1, 2019.
The rules for investing in Mutual Fund schemes via Systematic Investment Plan or lumpsum payment are outlined. As an investor, you should examine your return expectations carefully before investing in either of the choices.
Choosing ELSS will allow you to take advantage of Section 80C tax benefits to the fullest extent possible. If you are investing at the end of a financial year or if you have a higher risk appetite, Lumpsum investments will be a better fit. SIPs, on the other hand, are excellent if you wish to avoid risks and have a consistent source of income.