If you have ever invested in mutual funds, you may know the terms like SIP and ELSS. Though some investors use both of them together, the meanings of these terms are different. Cannot believe it?
Let us break the myth with a detailed discussion. In this blog, we will discuss the definition, key features, and the difference between ELSS vs SIP so that you can clear your doubts.
Understanding ELSS (Equity Linked Savings Scheme)
An Equity-Linked Savings Scheme (ELSS) is the only type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act 1961. By investing in ELSS funds, you can claim a tax deduction of up to ₹1,50,000 annually.
The asset allocation of ELSS funds primarily consists of 80% invested in equities and equity-related instruments like listed shares.
They may also have some exposure to fixed-income securities. One of the key features of ELSS funds is their lock-in period, which is just three years and this is the shortest among all Section 80C investment options.
Key Things to Remember About ELSS Funds
Here are some of the important points to remember before investing in any ELSS Mutual Fund:
- Equity Allocation: A minimum of 80% of the funds are invested in equities.
- Lock-in Period: ELSS has a mandatory minimum lock-in period of 3 years.
- Market-Linked Returns: The returns from ELSS are linked to market performance, depending on how the underlying equities perform.
- Diversified Portfolio: ELSS funds usually invest across a range of equities from different sectors, helping to mitigate concentration risks.
- Tax Benefits: Investments in ELSS qualify for tax deductions under Section 80C, up to ₹1.5 lakh.
Understanding Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is a method of investing in Mutual Funds or stocks where you contribute a fixed amount regularly such as weekly, monthly, or quarterly.
You can start with as low as ₹100 per month. Similar to a recurring deposit, SIP is a hassle-free option with automatic monthly deductions.
It is a popular choice among Indian mutual fund investors as it promotes disciplined investing. SIP is an ideal strategy for long-term investments and wealth creation.
Important Features of SIP
Before understanding the difference between SIP and ELSS, here are some important features to know about the Systematic Investment Plan:
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Discipline and Organisation
A Systematic Investment Plan (SIP) helps to create discipline and structure in the investment process. Once an SIP is set up, you have the flexibility to contribute on a weekly, monthly, or quarterly basis, depending on the scheme.
This flexibility ensures that you do not face financial strain and makes investing both convenient and manageable.
Even in the fluctuating stock market, SIP helps by allocating more units when prices are low and fewer units when prices are high, thereby optimising the investment strategy.
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Small Contributions
Unlike many other investments that require large amounts of capital, mutual funds provide an accessible entry point for most investors. With SIPs, you can start investing with as little as ₹100. This flexibility ensures that even if you are a small investor, you can build a portfolio over time.
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Convenience
One of the standout benefits of SIP mutual funds is the ease of investing. Once the mutual fund is selected, you simply need to enable auto-debits through your bank account.
The clearing corporation deducts the account automatically, whether weekly, monthly, or quarterly. This eliminates the need for manual payments which you may forget.
This makes it a convenient choice if you are a busy individual and prefer an automated investment process.
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The Power of Compounding
Compounding occurs when the returns earned on an investment are reinvested, generating additional returns. The longer you stay invested, the more significant the impact of compounding becomes, leading to higher profits over time.
This is particularly beneficial for those who start investing early and commit to long-term growth. By investing through SIP, the compounding effect amplifies returns, allowing interest to be earned not just on the original principal but also on the accumulated interest.
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Flexibility with SIP
One of the significant advantages of SIP is its flexibility. You can pause or stop your SIP at any time without penalties, unlike recurring deposits, which impose fines when you stop the contribution.
If you need to miss a payment due to insufficient funds, you can just skip that month’s contribution and resume the SIP without any issues or charges in the following cycle.
This flexibility gives you peace of mind as you can adjust their contributions based on your current financial situation.
Key Differences Between ELSS and SIP
Follow this table to understand the key differences between ELSS funds vs SIP:
| Aspect | ELSS (Equity-Linked Savings Scheme) | SIP (Systematic Investment Plan) |
| Definition | A mutual fund that provides tax benefits under Section 80C. | A method of investing a fixed sum periodically in mutual funds. |
| Tax Benefits | Eligible for tax deductions under Section 80C, up to ₹1.5 lakh. | No direct tax advantages. |
| Purpose | Primarily focused on saving taxes and building wealth through equities. | A structured approach to investing regularly in mutual funds. |
| Lock-in Period | Minimum 3-year lock-in for tax benefits. | No lock-in period (unless investing in ELSS). |
| Investment Type | Primarily equity-based mutual fund with a mandatory 3-year lock-in period. | Can be applied to any mutual fund type (equity, debt, hybrid). |
| Returns | Potentially volatile equity returns, but with long-term growth opportunities. | Returns are based on the type of mutual fund selected for SIP. |
| Risk | Higher risk because of the equity market exposure. | Risk varies based on the type of mutual fund chosen for SIP. |
| Taxation | Subject to long-term capital gains (LTCG) tax after 3 years. | Tax treatment depends on the type of fund used in SIP (LTCG/short-term). |
| Flexibility | Limited flexibility due to the lock-in period. | High flexibility; you can pause, stop, or modify SIP at any time. |
Summing Up
ELSS vs SIP are two separate investment strategies that complement each other but are not directly comparable. Using SIPs to invest in ELSS offers a convenient way to save on taxes which eliminates the need for last-minute efforts to reduce tax liabilities.
SIPs encourage consistent saving and, when applied to ELSS, can potentially boost returns through rupee cost averaging. Combining these two methods strategically can help you maximise the benefits of your investment approach.
If you want to start an SIP or ELSS investment, you can download our app Torus Digital. On this app, you can open a free demat account with zero AMC charges. Also, we offer direct mutual funds investment so that you can get the maximum returns.
