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SIP Vs Lumpsum: What Is Ideal For An ELSS Fund?

Equity-linked savings scheme (ELSS) is a kind of mutual fund scheme that essentially invests in equities, i.e., the stock market. It is an attractive avenue in which investments of up to ₹1,50,000 qualify for a tax deduction per the Income Tax Act of India, Section 80C. But should you choose a systematic investment plan (SIP) or make a lump sum deposit to invest in this scheme? Here's a look. 


Differences Between SIP and Lumpsum Investment


SIP

Lumpsum

You can invest a fixed amount of money at regular intervals (annually, half-yearly, quarterly, monthly or weekly).

You need to buy the chosen number of units in one go.

It doesn't depend on the timing of the market.

It uses the strategy of timing the market. 

You can develop financial discipline by building the habit of making regular and planned investments. 

It doesn't foster financial discipline since it involves a one-time investment.

It doesn't depend only on market turbulence. 

It is very market-responsive. 

It is suitable for investors with a low to moderate risk appetite.

It is better for investors with a moderate to high risk appetite.

The cost of investment is less due to rupee-cost averaging.

The cost of investment is high since it's a one-time investment.


Should You Choose SIP or Lumpsum Investment for an ELSS Fund? 

To decide whether SIP or a lumpsum investment is best for an ELSS mutual fund, consider the following factors:

 

Risk Appetite

The two investment methods differ significantly in terms of the degree of risk they carry. A SIP offers better capital protection since you invest just a part of your entire corpus in the plan.

For instance, if you invest ₹1.2 lakh in a financial year, you need to pay ₹10,000 monthly via SIP. Your total investment is spread out. So, the overall risk falls. Investors with a high-risk tolerance can choose a lump sum investment since it invests your entire amount in the market at once. 


Returns

In both cases, current market conditions influence the expected returns from the chosen fund. SIPs perform well even in unpleasant market conditions. However, a lumpsum investment in an ELSS fund has the potential to offer better returns in a steady market. 


Lock-In Period

These investment modes have different lock-in periods. Generally, SIP has a minimum lock-in period of 3 years, and it matures in a sequence. However, a lumpsum investment is unlocked in one go after 3 years. 

For instance, your lumpsum investment in an ELSS fund will mature after 3 years. On the other hand, SIP bonds will mature one by one (based on the months of your investment) after 3 years. 


Conclusion

Consider the above factors to choose the investment mode that's the best for ELSS mutual funds. If in doubt, speak to the experts at the fund house for guidance.

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