Introduction

Mutual funds have become a convenient financial solution today. Mutual funds are the answer if you want to invest in the stock market but not by directly buying stocks and having some flexibility and assistance. As you navigate mutual funds, you will encounter terms like Equity Linked Savings Scheme (ELSS) and Systematic Investment Plan (SIP). While both these terms are associated with mutual funds, they differ vastly. Read on to learn how ELSS and SIP investments differ.

ELSS and SIP: Understanding the meaning

Before we dive into the differences between ELSS and SIP, let us understand what they mean and how you can benefit from them.

ELSS or Equity Linked Savings Scheme, is a type of equity mutual fund known for its tax benefits. Investing in this scheme earns you a deduction of up to Rs. 1.5 lakh annually under section 80C of the Income Tax Act, 1961 if you opt for the old tax regime. You must stay invested in the scheme for a mandatory lock-in period of three years. This makes it a short-term investment compared to other tax-saving instruments. ELSS is equity-heavy, so you can build your capital while claiming tax benefits.

SIP or Systematic Investment Plan (SIP) is a disciplined investment approach in mutual funds. It lets you contribute a fixed amount at regular intervals. You can choose the frequency of investment in your chosen mutual fund scheme, which can be weekly, monthly, or quarterly. Also, you are free to choose the SIP amount, provided you meet the minimum investment limit for the scheme. With SIP, you can build a substantial corpus over time without the need to save up a lump sum amount.

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ELSS vs SIP: Key differences

Some of the main differences between ELSS and SIP plans are highlighted as follows:

• Purpose and Mechanism

ELSS is a specific category of mutual funds that helps save and achieve long-term capital growth through equity investments.

SIP is an investment strategy that lets you make regular, systematic investments in mutual funds. It promotes disciplined saving habits.

• Lock-in Period

A mandatory lock-in period of three years is one of the criteria for investing in ELSS. This means you cannot withdraw your funds before this tenure.

As SIP is not a scheme. So, it doesn't come with such a rule. Whether or not you are required to lock in your funds depends on the kind of scheme you invest in through SIP.

• Tax Component

As noted, ELSS is designed to provide tax-saving benefits under Section 80C if you opt for the old tax regime. This is the scheme's highlight.

SIP, by itself, does not offer any tax benefits. However, investing in tax-saving funds like ELSS through SIP allows you to save on the tax component.

• Flexibility of Investment

You can choose to invest in lumpsum or periodically in the ELSS scheme. This gives you complete flexibility based on your financial situation and convenience.

SIP was introduced to provide flexibility in investment in terms of frequency and amount. Hence, through this method, you can invest a low or high amount at regular intervals in your chosen scheme.

• Risk and Returns

As an equity-oriented scheme, ELSS carries market-related risks but also offers the potential for higher returns if you stay invested over a long period.

With SIP, the risk and reward profile depend on your chosen mutual fund scheme. Besides, if you stay invested long-term through SIP, you can mitigate market volatility through rupee cost averaging.

Combining ELSS and SIP investment

If you like the benefits that both ELSS and SIP provide, you don't necessarily have to choose between the two. As ELSS is a mutual fund scheme and SIP is the investment method, you can easily combine them. You can leverage the benefits of both by investing through SIP in an ELSS fund. With this strategy, you can make regular investments in the tax-saving instrument. You can combine tax-saving efficiency with a disciplined investment approach.

It's worth noting that each SIP investment will have its own three-year lock-in period in an ELSS fund. For example, the 500 in one month will have a three-year lock-in period that starts on the investment date in March. For the next investment in April, the lock-in period starts at a slightly later date (i.e. one month after the previous SIP)

Conclusion

Now that you have learned about the difference between ELSS and SIP, you can effectively plan your mutual fund investment. ELSS serves as a tax-saving instrument with a focus on equity markets. On the other hand, SIP is an investment approach that allows you to deploy your funds in mutual funds. With this clarity on the differences, you can align your investment with your financial goals and risk tolerance. You may also optimise your investment strategy for long-term wealth creation, considering the unique features of ELSS and SIP.

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