Should You Invest in ELSS Funds Via SIP or Lump Sum?
Taxpayers who are on the lookout for tax-saving instruments should consider investing in Equity-Linked Saving Scheme (ELSS) which invest in the share market. It helps in the maximization of wealth as well as in reducing the amount of tax payable.
ELSS is a form of equity mutual fund that gives high returns and has tax benefits. There are two options for an investor to invest in the same—Systematic Investment Plan (SIP) or a lump sum investment. It is important to understand the peculiarities of both the investment options before zeroing in on one.
Systematic Investment Plan or lump sum
A majority of individuals prefer to invest in ELSS funds through an SIP. With an SIP, investors can diversify the investment and reduce their risk associated with the same. Some of the primary advantages of an SIP are mentioned below:
- Brings financial discipline in an individual
- Helps individuals achieve their long-term financial goals through regular investment
- Offers investors the benefit of compounding of interest
- Generates higher returns
- Helps reduce the overall transaction cost for the investor since each purchase is made at different rates
But not everything in SIP is good from an investment point of view. Some of the major disadvantages of an SIP that act against an investor are as follows:
- Beneficial only if the investment is made for a long tenure
- No guaranteed returns as it depends on market volatility and on particular fund houses
- The concept of averaging cost may not always work in your benefit
So, does this mean that you should opt for lump sum payments? You must weigh the pros and cons of lump sum investment before taking the plunge. Here are a few significant advantages of lump sum payments:
- Helps generate returns in the short-term as well
- Offers investors the benefit of compounding of interest, just like SIP
- Offers flexibility to investors as they can choose to invest when the market is slump in order to purchase higher units
Again there are some downsides of the lump sum route as well. Some of the disadvantages include the following:
- No guaranteed returns as it is dependent on market volatility. If you invest when the market is high, you will end up with lower units.
- Once invested, your money is blocked and you cannot make any change in the portfolio for three years due to the specific lock-in period.
- Variable earnings as it depends on how the lump sum amount has been invested and which stocks are purchased for the same
In most cases, individuals with a regular monthly income choose to invest through SIP, while people with a seasonal business go the lump sum way. However, the decision to invest in a tax saver mutual fund through SIP or lump sum payment depends on the income and financial stability of the investor. There are no guaranteed returns in any case. For a beginner, SIP is an ideal way going forward although a majority of individuals who choose to invest in a tax-saving mutual fund at the last moment end up paying in a lump sum.