ELSS (Equity-Linked Savings Scheme) is the only type of mutual fund that helps in claiming tax deductions under Section 80C of the Income Tax Act of 1961. It is one of the most preferred mutual funds schemes in the financial market of India. Now, one can choose to invest in this mutual fund by either making a lumpsum investment or through a SIP (Systematic Investment Plan). Both these forms of investing have their benefits, and for someone new to the mutual fund investment world, choosing between one can get a bit tricky.
To help with this dilemma, this article lists down both ways of investing in detail for investors to decide which is more preferable:
- Making lumpsum investments
This involves a one-time amount that is invested to capitalise on the returns that are accumulated throughout the entire tenure of the plan. This can help in generating a substantial return on investment, one which is generally slightly higher than the returns of SIPs. With a lumpsum investment in ELSS, the investment has a 3-year lock-in period. Once this period is completed, the entire sum can be withdrawn in one go.
Benefits of a lumpsum investment:
- Investors can enjoy better tax benefits
By making a lumpsum investment towards ELSS at the start of the financial year, an investor can enjoy one of the key mutual fund benefits, which is claiming tax deductions. As per Section 80C of the Income Tax Act, an investor can claim tax deductions up to Rs 1.5 lakh from their total taxable income.
- Lumpsum investments can be ideal for self-employed professionals
Unlike salaried individuals, self-employed individuals usually do not have a regular source of income. In such cases, investing in a SIP might not be feasible for those not earning revenue on a monthly basis. Instead, it can be easier for self-employed individuals to rely on seasonal revenues to make lumpsum investments.
- Investing through SIPs
SIP involves making investments of small amounts of money on a regular basis (monthly installments). They generally offer a minimum 3-year lock-in period that matures sequentially, depending on the months of investment. Since investors are not required to pay a lumpsum at one time, this lowers the financial strain of investing. Returns of SIPS are usually slightly lower than those of lumpsum investments.
Benefits of investing through SIPs:
- Investors can take advantage of Rupee Cost Averaging
Investing in SIPs can allow the individual to take advantage of Rupee Cost Averaging. This involves purchasing more units when the market is down which helps in reducing each unit’s cost of investment. These units can then be sold when the market reaches its peak, thus increasing returns.
- SIPs lower the risk of market fluctuations
In a SIP, the investments are spread over a period of time. This helps in lowering the risk of market fluctuations as only a small part of an individual’s investment is facing market volatility. This can prove to be very helpful for those who are looking to invest in mutual funds for the first time. By starting with a small amount through a SIP, an investor can benefit by a significant margin when the market starts improving.
Before deciding whether to invest in a lumpsum or start a SIP, make sure to consider factors such as the pattern of maturity, returns of these investments, as well as your risk appetite.
