What Is The Difference Between ELSS and SIP?
Investments in the Indian mutual fund sector have become increasingly popular. However, investments these days entail so many terms that a new investor would be left perplexed. An example of one such mix-up is the confusion between ELSS and SIP.
Let us look at both in detail to understand.
What is ELSS?
Equity-linked savings schemes (ELSS) are a type of mutual fund investment that primarily invest in equities or equity-related products. The other noteworthy facts about ELSS funds are that they come with a mandatory lock-in period of three years and are also a significant tax-saving option under Section 80C of the Income Tax Act. The LTCG tax of 10% also does not apply if the investor’s returns are less than Rs1 lakh in a given year. Further, he/she can claim up to Rs1.5 lakh as a tax deduction against ELSS investments under the Section 80C.
What is SIP?
A systematic investment plan (SIP) is an investment method that helps investors invest a pre-determined amount at specified intervals (weekly, monthly, bi-monthly, and so on) in any type of mutual fund. SIPs are very beneficial to investors who are unable to invest lumpsum amounts, and it also inculcates a habit of saving as well as investing discipline in individuals.
An SIP also allows investors take advantage of rupee cost averaging, which means that you will be able to buy more units when prices are down and vice versa. SIP is a tool that spreads investments over a period of time rather than asking you to make a lumpsum investment. This feature of SIPs is very beneficial for individuals who are new to investing and can only spare a part of their earnings towards investments. SIPs generate different tax benefits and liabilities according to the type of mutual fund they are investing in.
Difference between ELSS and SIP
ELSS is a mutual fund that invests primarily in equities, whereas SIP is a technique of investing in a mutual fund. SIP is applicable to all kinds of mutual fund investments, including ELSS. ELSS funds assist the investor to save tax and generate higher returns as they primarily invest in the equity markets, which comparatively provide higher returns.
SIP, on the other hand, allows an investor to invest as per their capacity. This way, one does not feel the pinch of having to invest a substantial amount, and also gets to learn about investment discipline. Over a period of time, SIP investments help increase your capital by a great margin through the power of compounding.
An individual with a regular flow of income can opt for the SIP method to begin their financial journey. Opting for a SIP is a fairly simple process, where the individual will give standing instructions to their bank to debit a certain amount from their account on a specific date. This amount will be debited automatically and directly invested in the mutual fund.
ELSS and SIP are two very different concepts as ELSS is an investment whereas SIP is a means for the investment. While ELSS funds have a lock-in period of three years, the duration of the SIP depends upon the nature of the investment.
However, before investing in ELSS or any other instruments, one has to conduct due diligence.