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SIP vs ELSS: Difference Between SIP and ELSS

3 Mins 08 Feb 2023 0 COMMENT

SIP and ELSS are two of the most common terms you'll encounter when researching mutual funds. Therefore, it's no surprise that one might try to compare the two. Even though the title suggests that ELSS and SIP are comparable, in reality, they cannot be compared. 

Equity-linked Saving Scheme, or ELSS, as it is commonly called, is a type of tax-saving mutual fund scheme, while a Systematic Investment Plan, also known as SIP, is one of the two ways of investing in mutual funds.

Rather than comparing them, let's examine the concepts and features of both.

What is SIP? 

There are two ways of investing in mutual funds—the lump sum method or the SIP method. When you invest in a lump sum, you invest a big sum in a mutual fund. By contrast, when you choose the SIP method, you invest a particular amount in fixed intervals. 

By choosing the SIP method, you space out your investments over time. This helps you manage your investment across different market cycles. Also, it helps you develop an investment habit. You can start a SIP with as little as Rs 500 every month. 

If you don’t want to make monthly investments, you can also take a SIP every week, quarter or every six months. 

What is ELSS? 

ELSS, or Equity-Linked Savings Schemes, is one of several types of mutual funds available in the market. ELSS is a tax-saving mutual fund that helps you to save taxes on your investments. At the same time, it provides higher returns than FDs since returns are market-linked.

You can claim up to Rs 1,50,000 deduction per annum on your income under Section 80C of the Income Tax Act when you invest in ELSS. ELSS has the lowest lock-in period of all tax-saving investments—three years. Investing in ELSS can earn inflation-beating returns while enjoying tax benefits. 

Thus, we have clarified the difference between ELSS and SIP.

SIP or ELSS, Which is Better? 

By now, you should have understood SIP vs ELSS and how they are different concepts altogether. It really is not fair to compare a mode of investment with a type of mutual fund

Now, to highlight the most important point - An investor take advantage of both ELSS and SIP at the same time.

Since SIP is a mode of payment towards any mutual fund scheme, you can invest in ELSS via SIP.

SIP offers the following benefits:

  • Provides convenience and affordability when investing
  • Select from a variety of frequency options, such as weekly, monthly, quarterly, semi-annually, or annually. 
  • Provides rupee cost averaging benefits, where your fund manager buys a higher number of units when the Net Asset Value (NAV) is low and a lesser number when the NAV is high.
  • Helps you benefit from the power of compounding.
  • An opportunity to save taxes and build wealth
  • Tax-saving investments with the shortest lock-in period
  • Long-term ability to beat inflation
  • Provides inbuilt diversification by investing in different stocks belonging to different industries and market capitalizations.
  • A high degree of transparency is provided
  • The amount of investment is not limited

While ELSS offers the following:

Together, they make a smart and convenient tax-saving investment strategy.

However, we can look at the advantages of both. SIP helps you invest over a period of time. You can start your SIP journey with as little as Rs. 500 per month. These investments can be automated and, thus, help you develop an investment habit. 

ELSS can be an excellent way to benefit from tax deductions. At the same time, it helps you earn inflation-beating returns. If you want to increase your returns while enjoying tax benefits, you can choose to invest in ELSS. 

If you want the benefits of both, you can choose to invest in ELSS via SIPs. 

Conclusion 

Now that you understand the difference between ELSS and SIP, you can make smarter investment decisions for yourself. 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.