Saving tax on your returns is a concern for every investor. And there is nothing better to save your taxes than investing in Equity-Linked Savings Schemes (ELSS). These have gained traction as a tax-saving option with growth potential for retail investors.
However while investing in ELSS, one major question arises: Should you invest through a lump sum or a Systematic Investment Plan (SIP)? The following article will help you figure out which strategy is suitable for you. So, let’s begin.
Understanding SIP and Lumpsum Investment in ELSS
In a lumpsum investment, an investor allocates a significant amount in a single transaction. For those with excess cash or a bonus payout, this method can be enticing, especially given the 80C deduction of up to ₹1.5 lakh on ELSS investments.
Whereas, with SIP, investors contribute a fixed amount regularly (e.g., monthly), buying units at different Net Asset Values (NAVs). This approach mitigates timing risks and is affordable for individuals who want to build wealth gradually.
Comparing SIP and Lumpsum Investment in ELSS
Drawing a quick comparison can help investors align their choice of ELSS investment approach with their financial goals, risk tolerance, and preferences for tax-saving and wealth-building.
| Aspect | SIP Investment | Lumpsum Investment |
| Rupee Cost Averaging | SIP makes rupee cost averaging possible, lowering the effect of short-term market volatility. | Not applicable for lumpsum investments since the entire amount is invested at once, making the cost per unit fully dependent on market prices during investment. |
| Financial Discipline | Encourages regular savings and disciplined investing, which is easier to manage with monthly cash flows. | Encourages saving surplus funds at once, suitable for those who receive a large sum or bonus and want to invest it in a tax-saving avenue. |
| Reduced Market Timing Risk | Reduces exposure to market timing risks, allowing investors to navigate market cycles more smoothly. | Potentially higher returns if invested during a market dip, as the entire investment benefits from an upward market trend without the gradual nature of SIP. |
| Extended Lock-in Period | Each installment has a three-year lock-in period, extending the total duration of locked funds, as each contribution has its own maturity timeline. | The entire amount is unlocked after three years from the date of investment, allowing for quicker access to the full amount upon lock-in period completion. |
| Potential Missed Gains | SIP may miss some gains if the market experiences a sudden rally since smaller amounts are invested gradually over time. | If invested during a market peak, lumpsum investors may face losses if the market subsequently declines, making it a riskier choice if timing is off. |
| Liquidity Impact | Lower impact on liquidity as SIP contributions are smaller, allowing for easier cash flow management and adjustments. | Lumpsum investments can impact liquidity significantly as a large amount is locked in immediately, better suited for investors with ample disposable funds. |
Comparing Returns: SIP vs. Lumpsum
Let’s consider a hypothetical example based on ELSS fund performance in FY24. Assume an investor made a lumpsum investment of ₹1.5 lakh in April 2023.
With an average ELSS fund return of 18% over one year, this would yield around ₹27,000. Meanwhile, a SIP investor contributes ₹12,500 monthly benefits from rupee cost averaging, with returns varying depending on market trends throughout the year.
In recent years, SIP returns in some of the best ELSS funds have ranged between 10% to 15%, especially in volatile markets, making them a competitive option when compared with a lump sum.
For more detailed calculations, a lumpsum calculator can project expected returns based on various growth rates, helping investors decide on the best method for their situation.
Conclusion
The decision between lump sum and SIP investing in ELSS funds is based on risk tolerance, market forecast, and personal financial objectives. A balanced approach, using both methods, can be effective—allocating a portion as a lumpsum while continuing SIPs to capitalize on market trends.
By understanding these approaches and using tools like a lumpsum calculator, investors can maximize tax benefits and long-term returns in some of the best ELSS funds.
