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ELSS Vs SIP: 5 major differences

  • Marisha Bhatt
  • Jan 12 2022
  • 5 minutes
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One of many investment options available to investors in mutual funds. Mutual funds have time and again proven that they can be a safe bet especially for long term investors. Mutual funds provide a wide range of investment options depending on the investor’s risk profile or investment objective. Tax savings are one of the many advantages of mutual funds which are provided under the ELSS category of mutual funds. Another important term used in mutual funds investment is SIPs. There have been many cases where investors have been confused between ELSS and SIPs.

Let us understand these two important terms of mutual funds in detail.

What is ELSS?

ELSS or Equity Linked Savings Scheme is the tax savings option available to the investors under the mutual funds category. These funds are equity oriented schemes that provide the benefit of tax deduction to the investors under Section 80C of the Income Tax Act, 1961. The maximum deduction available under this category is Rs 1,50,000 for every financial year. These funds come with a minimum lock-in period of 3 years.

What is SIP?

SIP (Systematic Investment Plans) on the other hand is a mode of investment in mutual funds and not a separate fund category like ELSS. Every mutual fund provides the investors with the option to invest in a lump sum mode or under a systematic plan. This Systematic plan allows the investor to invest a fixed amount in any mutual funds scheme at periodic intervals. These intervals can be monthly, weekly, and half-yearly. Investors have the benefit of starting their investments with an amount as low as Rs. 500 and can gradually increase their portfolio over time. These periodic payments towards funds can be set by mandating standing instructions to their bank account.

5 major differences between ELSS and SIP

ELSS and SIPs are inherently different concepts and hence cannot be compared on an apple to apple basis. Understanding them more clearly will help in getting a clear idea about the differences between them. 

  1. Difference in meaning

ELSS is a separate investment category specializing as a tax saving option under mutual funds. SIPs on the other hand is an investment mode that is available not only under the ELSS category of mutual funds but also for other mutual funds.

  1. Lock-in period

ELSS funds come with a minimum lock-in period of 3 years. When an investor invests in ELSS funds through SIPs, the same principle of lock-in period applies to such investment too. When the investor fails to make timely payment of the SIPs, the fund house can levy a penalty on such defaults as per guidelines.

  1. Tax benefits

The tax benefit is the main attraction of the ELSS funds. Investment in these funds can get the investors a benefit of tax deduction of up to Rs.1,50000. Investment through SIPs can also give such tax benefit, provided, investment is in ELSS funds and not in any other funds.

  1. Option to move to another fund

Mutual funds provide the benefit of exiting the fund at any point. This feature is available for investment through SIPs or lump sum investments. However, in the case of ELSS funds, this benefit is not available. Investors cannot exit the fund till the lock-in period of 3 years is not completed.

  1. The benefit of rupee cost averaging

The benefit of rupee cost averaging is the prime benefit of investing through SIPs. Over time the average cost of investing in mutual funds through SIPs is lower than lump sum investment. Also, investors can get more units of the fund if the NAV decreases as SIPs are constant and if the NAV increases, the value of their investment will increase.

This benefit of SIPs can be availed in ELSS funds too if investment in such funds is through SIPs.

ELSS or SIP- which is better?

As mentioned above, ELSS and SIPs are two different concepts that come under mutual funds. Trying to compare them is like trying to compare apples to oranges. So there is no question of which is better. What investors can do is combine the benefits of both these concepts to gain maximum advantage.

By investing in ELSS funds through SIPs, investors can gain the benefit of systematic tax savings options and do not have to scramble at the last minute to reduce their tax incidence. Investing through SIPs will create a savings discipline among the investors and will also give them the benefit of rupee cost averaging thereby ultimately increasing their returns under ELSS funds.

Hence, the answer to which is better among ELSS and SIPs is combining the two to get a better form of investment for investors.

FAQs

1. Is ELSS suitable for new investors? 
Yes. Investment in ELSS funds through SIPs is one of the ideal investment options for new investors.

2. What is the maximum tax benefit available under ELSS funds?
The maximum tax benefit available under ELSS funds is a deduction of up to Rs.1,50,000.

3. How are units under ELSS funds redeemed if they are invested through SIPs?
When investment in ELSS funds is made through SIPs, the units bought first will be redeemed first when such units complete the lock-in period of 3 years. In short, redemption will be on a first in first out basis as and when the units are held by the investor for a minimum period of 3 years.

4. What is the taxation on redemption of investments made through ELSS?
ELSS funds provide the benefit of tax deduction up to Rs. 1,50,000 but they are not tax free investments at the time of redemption. When ELSS funds are redeemed, they are subject to long term capital gains. Taxpayers, however, have the benefit of exemption up to Rs. 1,00,000 per financial year beyond which they are taxed at a rate of 10% (excluding cess and surcharge)

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