ELSS vs SIP : Difference between ELSS and SIP

(Last Updated On: April 27, 2017)

SIP is a way to invest into ELSS or other mutual funds in a recurring way. In this post we look at various aspects of investing into ELSS via SIP mode.

systematic investment plan (SIP) is a small and easy method to invest one’s money in mutual fund schemes. SIP is very much similar to recurring deposit scheme wherein an investor invests small amount of money on regular basis. The SIP scheme helps an individual investor to invest under in the Mutual Fund scheme in instalment instead of a lump sum of amount. This blog helps investors understand the difference between SIP and ELSS. Here we we look at ELSS vs SIP in details.

SIP as a scheme brings the benefits of mutual fund to middle class individuals who have a smaller earning capacity and are not able to make huge lump-sum investment at a given time. Moreover it helps the investor to average out the risks while investing in the equity markets.

SIP is just a system or investment plan to invest monthly into the mutual funds.

Here are a few popular mutual fund schemes to SIP into. All returns are via the SIP mode and as of writing of this blog.

Scheme Return for 3 years Return for 5 years
SBI Blue Chip Fund 22.74 18.82
Birla SL Frontline Equity Fund(G) 21.23 17.29
Franklin India Prima Plus Fund(G) 24.55 17.89
Mirae Asset India Opportunities Fund-    Reg(G) 24.37 18.88
HDFC Mid-Cap Opportunities Fund(G) 33.33 24.77

You can check out a few Best Mutual Fund SIPs to invest in 2017.

A Equity-linked savings schemes (ELSS) are mutual fund investment scheme wherein an individual investor is allowed to contribute a said amount up to Rs.1.5 Lakh. This amount invested (restricted to Rs.1.5 Lakh) is allowed as tax exemption under section 80C. Every ELSS investment has a lock-in period of 3 years. ELSS provides oneself dual benefit viz., tax saving as well as investment earning.

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ELSS is a type of mutual fund which can help in tax saving for the individual. SIP is one way to invest in Mutual Funds which can be ELSS as well. You can invest into ELSS via the lumpsum mode as well.

You can check out a few good ELSS Schemes to invest in 2017.

Here are some of the things to take into account when investing in SIP or ELSS:

Investment Process

In SIP: One can invest on regular instalment basis as an alternate to lump sum payment. You can invest into the ELSS as well via the SIP mode.

In ELSS: One can either opt to invest under SIP mode (i.e. to invest small amount on regular basis) or opt for one time lump sum investment. ELSS is just another mutual fund scheme.

Tax benefit

Under SIP:  Only investment in ELSS Mutual funds enjoy 80c tax benefits. The taxation on the gains from Mutual funds may or may not be taxable depending upon the mutual fund scheme.

Under ELSS: Any amount invested under ELSS scheme can be claimed as deduction from taxable income up to a limit of Rs.1.5 Lakh under section 80C. Also even if ELSS is opted under SIP system of investment then the same is tax exempted up to the above mentioned limits.

Risk

Under SIP:  SIP investment plan are subject to market fluctuation as any other investment scheme. But SIP plan safeguards an individual from market peaks and drops as the investment amount is spread over the period of time and not accumulated in one go. This investment scheme allows oneself to average out the net impact of market crunches if any.

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Under ELSS: ELSS scheme investments are just a kind of mutual funds and hence subject to market risk. But majority of the funds contributed under ELSS are under government securities or government recognised security thus the risk is marginally lower than any other investment scheme.

Lock-in period

Under SIP:  The lock-in depends on the scheme opted. It may vary from 0-1 year for equity funds and more for debt funds. The ELSS SIPs are locked in for 3 years.

Under ELSS: The lock-in period for all the funds invested whether in lump sum or under SIP payment scheme is 3 years. But the investor can continue after the period of 3 years without making any further investment.

Note: Also in case SIP (ELSS) scheme is opted, one can stop payment of instalment investment anytime but the amount accumulated would be withdrawn only after 3 years.

I hope we were able to take home the point that while the ELSS is a kind of mutual fund, SIP is one of the modes via which an individual can invest in Mutual Funds. Two are entirely different terms and one can also SIP into the an ELSS scheme. SIP is nothing but investing into mutual funds in intervals rather than doing the investment all in lump-sum

The ELSS (SIP) scheme will help an individual:

  • Earn Higher
  • Enjoy tax benefit u/s 80C up to Rs.1.5 Lakh
  • Mitigate (reduce) market risk

 

Summary view

Particulars Systematic investment plan (SIP) Equity-linked savings schemes (ELSS)
Investment Process Investment is to be made in smaller amount at regular interval as decided Investment can be made in lumpsum or as per SIP plan
Tax Benefit Contribution made under SIP system (except when ELSS scheme is opted) is not eligible for tax benefit any contribution made under ELSS scheme is tax deductible u/s 80C for an amount of Rs.1.5 Lac
Lock-in Period None 3 years
Risk SIP investment plan are subject to market fluctuation but  the SIP plan also safeguards an individual from market peaks and drops as the investment amount is spread over the period of time and not accumulated in one go. ELSS contribution are majorly invested under government securities or government recognised security thus the risk of losses is marginally lower than any other investment scheme.
READ  ELSS Wiki : Resources on ELSS Schemes

Disclaimer: The above blog can’t be taken as an advice and the reader should do their do diligence before investing.

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