Equity-Linked Savings Schemes (ELSS) and Systematic Investment Plans (SIPs) are among the most common terms you will come across when investing in mutual funds. However, they serve different purposes and can't be directly compared. ELSS is a type of mutual fund that primarily invests in equities and offers tax benefits under Section 80C of the Income Tax Act. On the other hand, SIP is a method of investing in mutual funds, including ELSS. Following this method, you gradually invest a fixed amount regularly rather than a lump sum.
In this article, we will understand ELSS vs. SIP in detail by studying their several features, benefits, and key differences.
Difference between Features of ELSS and SIP
1. SIP as an investment avenue in ELSS
- While ELSS is a mutual fund category aimed at saving taxes, SIP is a methodical approach to investing in mutual funds, including ELSS. The distinction is clear: one is a product, the other a process. Through SIP investments, investors can commit a fixed amount regularly – be it weekly, monthly, or annually – towards investing in mutual fund schemes, ELSS included.
- Investment flexibility: Starting with as low as Rs. 100 per month, SIPs offer an accessible route to mutual fund investment, including the tax-saving ELSS funds.
2. Lock-in period considerations
- Understanding lock-in: The concept of a lock-in period is pertinent to ELSS, not SIPs. ELSS funds mandate a lock-in period of three years, during which investors cannot withdraw their investment. Conversely, SIPs, as a mode of investment, do not inherently possess a lock-in period; however, if invested in an ELSS fund, each SIP instalment adheres to a separate three-year lock-in from its investment date.
Difference between Advantages of ELSS and SIP
ELSS benefits:
- Tax savings: Unique to ELSS funds, investors enjoy tax deductions under Section 80C up to Rs. 1,50,000. (Also, read about the income tax slabs of FY 2024-25 for more details around taxation).This tax benefit, exclusive to ELSS within the mutual fund universe, allows investors to reduce their taxable income by the amount invested in ELSS funds, regardless of whether through SIP or a lump sum investment.
SIP advantages:
- Disciplined investing: SIPs facilitate a disciplined approach to investing, allowing participants to build a substantial corpus over time through regular, small investments. This method is especially beneficial for long-term financial goals, offering flexibility and ease of investment.