What Works Better for ELSS Mutual Funds- SIP or Lump Sum

Introduction:

Varun invested in ELSS mutual funds three years ago in a lump sum scheme. The markets were good and ELSS mutual funds being market-linked also gave good returns. Seeing this, his friend Dhiren also made a lump sum investment in the same fund. But since the markets were low, Dhiren's returns were low as compared to Varun. Here, markets played a role in differentiating in situations and thus the returns.

Similarly, ELSS investment may not always be suitable through a lump sum. Sometimes, SIP investment might prove better. How to identify this? Let's understand from the very basics of ELSS mutual funds.

What is ELSS mutual fund?

Equity Linked Savings Scheme (ELSS) funds are open-ended equity mutual funds with an additional income tax deduction under Section 80C of the Income Tax Act of 1961. You can claim a tax deduction against your investment in ELSS for up to Rs.1.5 lakhs each financial year. It is also enhanced by the benefits of investing in equity securities. ELSS comes with a three-year statutory lock-in period, and they're also called tax-advantaged funds.

When investing in ELSS mutual funds, you can opt for a lump sum investment or SIP investment. In a lump sum, you invest a large sum (say Rs.100000) at once, but in SIP (systematic investment plan), you invest the same sum in a staggered manner (say Rs.5000 per month).

Additional read: ICICI Direct- Mutual Fund concepts (Part 1)

While investing in ELSS, both SIP and lump sum investment have their pros and cons.

Advantage of lump-sum investment in ELSS mutual funds:

1. If you are into seasonal business, you might want to consider investing a lump sum amount. You could also combine lump sum and SIP investments based on your monthly inflows. That ensures you are not in debt while investing.
2. If you have the funds ready for investment, investing the entire section 80C tax benefit amount at the beginning of the fiscal year is recommended as the money remains invested for a longer duration. Long-term investing allows you to earn higher returns on your money.
3. SIP is an excellent option for you if you are a salaried individual. This aids in the development of investment discipline.
4. When you intend to invest a large sum of money, it is critical to time the market appropriately. However, you are not required to worry about timing the markets if you invest in ELSS through SIP.
5. SIP investments ensure that you won't have to face financial hardship while investing, as only a tiny sum is needed regularly.

Advantages of SIP investment in ELSS mutual funds:

Which route is better for ELSS mutual fund investment?

When you invest a lump sum amount in an ELSS, you buy units worth the investment amount at the current market price. The amount of money you make will be determined by the fund's Net Asset Value (NAV).  

So, when you invest in a lump sum, do so in a less volatile market for high returns because cost averaging becomes irrelevant. In high volatility, SIP investment is suitable due to the flexibility of cost averaging. Simply put, when the NAV is lower, you can accumulate a more significant number of units and vice versa. Because the investments are made over the course of the entire term, each instalment will be invested for a different time and will earn an additional amount.

Conclusion:

Opting for a lump sum or SIP investment in ELSS depends on your financial situation, cash flow, market volatility, risk tolerance, and timing. Lump-sum investments are a better fit if you invest at the end of the financial year or have a higher risk appetite. SIPs, on the other hand, are ideal for avoiding risks and ensuring a steady stream of income. So, make sure to pick the best method for you and begin investing in ELSS funds on our mutual fund app.